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Bleak House

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Last week, the Indian market as expected corrected itself after the previous week's sharp upturn with the Bombay Stock Exchange (BSE) 30-share Sensitive Index (Sensex) losing nearly 4 per cent to end at 16,213.46. The fall was more to do with domestic events than global. Players offloaded their position after the government suspended it plans to allow foreign direct investment (FDI) in retail. The inability to implement policy reforms by the government has been the biggest concern for the market. Concerns over the government's finances, particularly rising fiscal deficit after it cut India's economic growth forecast to 7.25-7.75 per cent from the earlier 8 per cent also added to the woes.

"Until know, despite all the poor economic indicators, growth wasn't impacted. This is the first time we are witnessing bleak economic growth and that is bad for the market," says Avinash Gorakshakar, vice-president and head research at Edelweiss Financial Advisors. He adds that the fall in the market is also because players have sold their position ahead of the dismal IIP numbers on Monday. "The IIP number is expected to be poor than the September months' number and the market has already factored it in the price," says Gorakshakar. The broader consensus on the October 2011 IIP numbers is at -0.7 per cent on a year-on-year basis. The inflation data on Wednesday, 14 December 2011 and the Reserve Bank of India (RBI) policy on Friday, 16 December 2011 are some important events that would provide direction to the markets. Analysts expect inflation to slip on a year-on-year basis to 9.04 per cent compared to 9.73 per cent.

Meanwhile, the third quarter advance tax collection on 15 December 2011 will be crucial for the market as it will give indication about the December-end quarter results of India Inc.

In India there is a lot of concern about the lack of governance and poor accountability within the government. A consistently high inflation is the other concern. Today the problem for the Indian market is if FII flows don't start pouring in it could lead to depreciating rupee and lower exports and impact our ballooning fiscal deficit further. In an environment of high inflation and fiscal deficit, RBI doesn't seem to cut rates in a hurry.

The outcome of the EU summit despite being in line with market expectations, is not going to help the market in a bigger way. The EU consensus does not end the problem with the European Union and global economies. In the next 6 months, there are going to be elections in the leading European countries like Germany and France. The ruling Christian Democratic Union has faced defeat in all the six state elections in Germany until September 2011. This is probably an indication that Chancellor Angela Merkel has not been able to convince voters to accept the rescue plan for the Euro Zone.

The next federal elections in Germany are due in September 2013. At present, it looks like taking tough decisions may be difficult. Similarly the environment in the US also looks bleak. The US is still grappling with problems of low employment, lack of growth and no consensus to reduce spending levels and manage debt. The ability to keep debt at manageable levels is exacerbated by the need to replace or upgrade infrastructure that has been created almost 50 years ago. With the US Presidential elections scheduled in 2012, the task of announcing measures that make economic sense becomes even more difficult. In such a scenario, the crisis in the west has not yet reached its conclusion and thus uncertainty will continue to prevail in the global and domestic markets. Faced with uncertainty, the markets will remain fragile.
Meanwhile, high volatility has become a part of the Indian market and the Sensex swing between its intra-day high and low is close to 2 per cent. Until India specific issues are not adressed, particularly regarding opening investment windows, it is difficult for equity markets to witness a clear upmove. Satish Menon, executive director at Geojit BNP Paribas Financial Services, feels, "Though we aren't in a bear market, it is possible that due to external and internal concerns markets may continue to witness swings, maybe with a downward bias over the next 3-6 months."