The year 2012 has begun well for the stock market. In just six weeks, the Sensex was up 13 percent which made up more than a half of the fall in the previous 52 weeks. Will this trend survive the rest of the year?
In 2011, the market had come into the firm grip of the bears and the Sensex was down 23 percent. Surely, many other markets had also underperformed. But the Indian market was hit much harder possibly because it has greater exposure to FIIs. The recovery of the stock market in January-February was mainly the correction of the excessive fall.
The Indian market is sensitive to FII investment which, last year, was influenced more by risk aversion from fears about European sovereign debt default, more particularly of Greece. Consequently, in 2011 there was a net USD 357 million outflow of FII investment. In 2010, the net inflow was USD 29.4 billion.
There are some positive trends that can prolong the recovery. The rupee has hardened and increased the return on FII investment in dollar terms. Inflation has eased and will ease further with bumper production of food grains if international commodity prices do not jump. The RBI has infused additional liquidity and will reduce the interest rates as well which will stimulate investment. These trends should boost the market.
Equally, there are discouraging elements. The fiscal deficit is, by all accounts, likely to exceed budget expectations. S&P has already hinted at downgrading India’s credit rating. The finance minister will therefore be tempted to go in for revenue raising measures rather than offer any incentives to the corporate sector. Even the proposed DTC and GST will be postponed. Besides, the industry does not seem to have enough steam to push forward and the CSO has estimated GDP growth at 6.9 percent, the lowest in three years.
The market also responds to changes in the political climate. To some extent, it has improved with recent court judgments. But Uttar Pradesh is going to the polls and the results, out on March 6, will have a significant impact on the government and the market.
There are no clear indications that in 2012 reforms will go through, that growth will be smooth and high, that inflation will ease, that corporate performance will improve. Besides, it does not appear FIIs have regained risk appetite fully though, for the time being, the crisis in the euro zone has been averted and unemployment in the US has diminished.
How the rest of the year will turn out and how the market will behave is still uncertain. It, however, appears that the trend in February should be positive with the Sensex making up part of the losses since the peak of 20,000 in January last year. The market may pause post the budget and if the monsoon is normal and euro zone stabilised, the Sensex should cross the earlier peak before August and a new peak thereafter.