India Markets Weekahead: All eyes on U.S. 'fiscal cliff'

Commuters walk past the Bombay Stock Exchange (BSE) building in Mumbai February 28, 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 volatile week which ended in the red, with the Nifty losing 0.54 percent as U.S. "fiscal cliff" worries weighed. The Reserve Bank of India (RBI) left key rates unchanged but the commentary indicated a definite cut in the January policy review, which enthused markets.

The winter session of parliament ended on December 20. This was the most productive session in the last two years with the passing of important bills such as foreign investment in multi-brand retail, companies bill and banking regulations bill.

Narendra Modi's third consecutive win in Gujarat was balanced by the Congress win in Himachal Pradesh, upsetting the incumbent Bharatiya Janata Party (BJP).

The 2014 elections would be crucial for the markets as the political formation seems extremely fragmented as of now and could have an effect on the reforms process and forward-looking policies initiated by the ruling government.

The focus will be on the U.S. "fiscal cliff" talks as it will now decide which way the markets would move in the short term. Logically, nobody would prefer a fiscal cliff resulting in massive tax hikes and spending cuts but a compromise on this issue by the Republicans seems a herculean task.

I still hope that the fear of an "engineered" recession will force a compromise as the eventuality of the fiscal cliff will have no one to blame but themselves.

The derivatives expiry on December 27 will also be eyed this week, which is expected to remain volatile. The markets should not breach 5800/5820 levels as a fall below that would trigger a fresh round of selling.

On the contrary, a resolution of the fiscal cliff could pave the way for a huge rally as the domestic outlook is extremely positive. The December-quarter results should show an uptick and a rate cut from the RBI would be another trigger.

A slew of policy measures is expected with the fresh confidence the government has gained after the winter session. Since the state elections are over, we could also have another round of diesel price hikes which would be taken positively by the markets.

Fresh allocation from FIIs and domestic liquidity would aid the move. I am still positive on the markets for the next few months and believe that non-resolution of the fiscal cliff can only delay the rally but will not reverse the positive trend we have seen in the past couple of months.