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Will the market rally sustain?

May 12, 2015 09:03 IST

Though analysts believe that the road ahead for the equity markets looks promising, there are a few factors that can spoil the party for the investors including monsoon failure and a sharp spike in crude oil prices

After witnessing a 723-point drop on May 6 to its lowest level in calendar year 2015 amid a global sell-off led by volatility in global bond markets, the S&P BSE Sensex has gained ground over the last two trading sessions.

After a 506-point gain on Friday, the up move continued on Monday with the 30-share benchmark adding over 350 points in intra-day trade.

So what explains the sharp rally seen over the last two sessions and is this sustainable?

The current up move, analysts suggest, is primarily led by foreign institutional investors (FIIs) who have found some comfort from the government's stance on the minimum alternate tax (MAT) issue. On Friday the government had clarified that the income tax department would not adopt coercive methods for recovery of minimum alternate tax (MAT) dues from foreign investors. Up to May 11, FPI/FII net investment in the Indian equity markets stood at a negative Rs 6,535 crore (Rs 65.35 billion), data show.

Explains Deven Choksey, managing director & chief executive, K R Choksey Securities: "Last week the markets slipped sharply as the FIIs sold on the back of tax levied on to them. The government is now in a damage control mode and has clarified on the MAT related issue. As a result, the FIIs seem to have stopped selling and this has led to the markets rising from the lows seen last week."

"Going ahead passage of the two bills - the Land Acquisition Bill and the Goods and Services Tax (GST) Bill by the Parliament will be important. The Land Acquisition Bill will bring a lot of new money to the economy. In case the bill is passed by the Rajaya Sabha (Lok Sabha as already passed it), the markets in the near - term will rally. I believe that a correction in the bull market is always a good opportunity to buy," he adds.

Besides the optimism shown by the FIIs after the clarity on MAT related issue, the markets have also gained ground post the concerns regarding a deficient monsoon have abated, at least for now. Though the Indian Metrological Department (IMD) expects the monsoon to be impacted by the El Nino factor, IMD expects the monsoon to hit Kerala on schedule on June 01.

Skymet, a private weather forecaster that had also predicted a normal monsoon this year, expects rain-bearing monsoon clouds to reach the Andaman region in the Bay of Bengal by May 25, and hit Kerala thereafter, reports suggest.

"The government now seems to be keen to solve the MAT muddle. This is an encouraging sign. The markets are also factoring in the weak results of India Inc in the March quarter and the general feeling among investors is that things should start looking up from here on. A normal monsoon prediction by Skymet has also aided sentiment," said U R Bhat, managing director, Dalton Capital Advisors.

From a medium - term perspective, investors can definitely look to buy at these levels. The Nifty can reclaim the 9,000 levels once again if investors see economic revival. The economy needs investment-led demand where entrepreneurs announce new projects, which will likely to happen over the next two - three quarters. I expect the Nifty to come close to its previous highs around Diwali," he adds.

The risks

Though analysts believe that the road ahead for the equity markets looks promising, there are a few factors that can spoil the party for the investors including monsoon failure and a sharp spike in crude oil prices.

"One cannot bank on cheap oil forever. A spike in oil prices to above $80 a barrel will be negative for the Indian markets. However, the chances of this happening seem remote as of now. I expect the oil prices to gain a maximum 3 per cent - 5 per cent from here on. A weakening rupee could also pose a threat to the overall sentiment. However, I expect it to remain around 64 levels against the USD over the next six months. At a global level, US economic growth will also be keenly watched," said G Chokkalingam, founder & managing director, Equinomics Research & Advisory.

On the domestic front, analysts do not expect the Reserve Bank of India (RBI) to slash rates in a hurry. They believe that the central bank will be in a wait and watch mode to analyse the monsoon's progress before taking a call on the rates. Though this could see some pressure on banking stocks, the overall market should remain buoyant, they suggest.

Puneet Wadhwa in New Delhi
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