After a five per cent fall in the benchmark stock indices last week, traders anticipate a bounce-back rally on Monday morning inspired by a surge in stock prices in the US and Europe on Friday, when the Federal Reserve cheered Wall Street after the Indian markets closed by slashing a key funds rate.
However, there could also be a negative effect from the weekend's political turmoil in New Delhi, where communist parties appeared poised to reduce or end support to the government following differences over the civilian nuclear agreement with the United States.
For the moment, the main concern is over what the shifts in global liquidity, caused by a crisis resulting from cheap "sub-prime" home loans in the US that suffered defaults, would do to Indian stocks.
“Indian markets would go up. The Sensex should open higher by a large gap of 350-400 points,” said Lalit Thakkar, Director, Research, Angel Broking. But it is not clear if the stocks would be able to hold on at higher after the initial surge, he added.
After the short-term interest rate cut by Federal Reserve of US on its loans to banks, Dow Jones and S&P surged by 1.8 per cent and 2.46 per cent, respectively. The biggest gainer after the Fed move was the FTSE-100 index, which in London reversed early losses and moved up 3.5 per cent. The Fed move is only a short-term measure to stem the liquidity crunch and to that extent the immediate gain in the stock markets would be limited, say experts.
"The fact the US Federal Reserve has intervened and reduced the Fed rate clearly reflects that the magnitude of the sub-prime crisis is much bigger than what it appears," said Yogesh Kapur of Enam Financial Consultants Ltd.
"Given the current redemption pressure some of the hedge funds are facing in their home countries, the Indian stock market is expected to witness selling pressure for some more time,” he added.
Foreign institutional investors (FIIs) sold a little over Rs 7,000-crore worth securities on a net basis last week. “When the global liquidity surged we witnessed net FII inflows and the indices hit newer highs. It is a reversal of that situation we are witnessing now,” said R Sreesankar, Head of Research, IL&FS Investsmart.
Away from the global turmoil, traders have turned their attention to the bickering between the members of ruling UPA coalition – Congress and Left Front over the Indo-US nuclear deal. The debates and disruptions in the ongoing monsoon session are expected to add to the market volatility.
“To an extent (India) has shown resilience to political developments," said Enam's Kapur. "Since the macro economic fundamentals remain unchanged, the long term growth story is expected to remain intact in the long term barring some hiccups, which might not have that significant impact on the market."
WNS Holdings, the NYSE-listed business process outsourcing company said on Friday its revenues will be impacted to the tune of $20 million this year on account of its exposure to the US mortgage businesses. Though the extent to which Indian IT companies are exposed to the mortgage business in US sub-prime market is not known, the news might add to poor sentiment. However, WNS is not listed in India.