Markets Weekahead - An opportunity to ride the rally

A broker monitors share prices at a brokerage firm in Mumbai August 8, 2011.

(The views expressed in this column are the author’s own and do not represent those of Reuters)

By Ambareesh Baliga

It was a stupendous week with 4.5 percent gain and the closing at 5879, the highest point for Nifty in 19 months. The week started with positive international cues of a Greek bailout, and was further strengthened with Moody's confirmation of a stable rating for India.

As I predicted last week, the breakout beyond 5650 was triggered by the government agreeing for a debate and vote on the contentious issue of foreign direct investment (FDI) in retail. The fence sitters didn't want to miss out on the rally and the short sellers were caught by surprise which led to a big move on Thursday, it being the derivatives expiry day. FIIs continued to pour funds, making India one the most favoured emerging markets in the current calendar year with the tally exceeding US$ 19 billion in foreign inflows.

The trouble shooters in Congress were on an overdrive, cajoling and pacifying the allies as well as the fringe parties. It is widely believed that they agreed to a vote only after being assured of it going in their favour in the lower house of parliament, Lok Sabha. There is still a doubt whether they will be able to push the reform through the upper house, Rajya Sabha, where the UPA allies and other friendly parties fall short of the required number by a whisker.

The incumbent government has in the past managed such situations well and thus the market is hopeful of the bill sailing through. More importantly, this has cleared the logjam which was threatening to engulf all pending bills, especially market critical ones like the companies bill, banking regulation, insurance, pension and forward contracts regulation. It has also shown the government's resolve in going ahead with policy action and reforms.

The flow of good news continued with a bullish report from Goldman Sachs which became overweight on India, expecting inflation to moderate and growth recovery to continue. This was followed by positive statements from various fund houses including Blackrock, Standard Chartered and a few others which changed the market's mood, leaving skeptics isolated.

Bharti Infratel announced its IPO plans to raise about 45 billion rupees, thus becoming the second largest offering after Coal India. The response to the issue could pave the way for more IPOs. The expected buoyancy in the primary markets could also be a shot in the arm for the divestment program of the government.

We need to watch out for the parliament session next week post which I don't see any domestic events that could stop the current rally. U.S. fiscal cliff is the only foreseeable international event in this calendar year which could have a bearing on our markets.

Auto numbers may spring a positive surprise as reports suggest a reduction of inventory at the dealer levels due to better-than-expected festive season demand. The India Manufacturing PMI will be announced on Monday. It could signal an uptick after the disappointing GDP numbers of last week. Market analysts discounted these numbers as a skeleton of the policy paralysis era, and expect a bottoming out in the current quarter.

Markets may continue with the momentum initially but would take a breather during the government's test in the Lok Sabha on December 4 and 5 followed by the session in the Rajya Sabha on December 6 and 7. It is possible that the market may touch levels closer to 6000 but I expect consolidation pending this important event. However, a note of caution which I have often repeated in my earlier columns, the scenario after budget is fraught with political uncertainty. As the parties get into the election mode, the possibility of a fractured mandate may emerge. A political scenario similar to 1996-97 would relegate the reforms bandwagon to the freezer.

Therefore, I would suggest riding the current wave that may last for the next few months and booking out before budget.