Inflation, global woes to keep market in check - Inflation to touch >7% mark

Duty cuts on edible oils will hardly make an impact on curbing rising inflation as it has been predicted that inflation would touch 7% mark in coming days.

The bulls, which appeared to be making a comeback in the last week of FY07-08, are likely to remain in the shadows in the coming week, as negative factors outnumber the positive. The lag effect of inflation rate, which soared to 7 per cent in the week to March 22, will continue to worry Indian investors, as they remain uncertain on what further measures the government and Reserve Bank will adopt to control rising prices. Question marks also remain over the new ICAI norms that companies will have to show their exposure to foreign exchange derivative in their balance sheets for the last quarter.

This, in addition to the volatile global markets amid fears the US is possibly already in recession. “We have been largely underperforming global markets because we have our own set of problems to deal with, and inflation being top priority right now. Having said that, I don't expect inflation to rise beyond 7 per cent. I am looking at it between 5-7 per cent in the coming weeks,” said Manish Sonthalia, vice president - equity strategy, Motilal Oswal Securities. “The problem is that people fear the RBI will hike interest rates, specifically, the CRR. But I don't think that will really solve the problem as this inflation number has more to do with supply constraints. So, if at all, the repo rate might be increased. But I think the RBI will wait, at least till April 29, to see how well the fiscal steps pan out before making any change in monetary policy," Sonthalia added. Reserve Bank of India will detail its annual credit policy on April 29. Governor YV Reddy has said inflation is unacceptably high, above its comfort zone of 5 per cent, and the central bank was ready to act if necessary.

The government, on its part, has scrapped import duties on most edible oils and banned exports of non-basmati rice in a bid to calm inflationary pressures. It has also asked cement and steel producers to lower prices. Rays of hope could be seen once fourth quarter earnings pour in, analysts opine. Motilal Oswal's Sonthalia expects 20 per cent growth for the Sensex companies. “A lot of the excess has already got corrected.

Commodity prices are starting to come off and gold prices are falling, which means risk appetite is returning. Therefore, as an asset class, equity will resume as the preferred choice.” “Valuation wise, I don't see much downside from here. But in terms of duration, the recovery will take some more time. I am looking at a broad range of 14500-18000 on Sensex,” he added