Stock market investors in India will continue to look overseas for direction in the week ahead. For optimists, who think stocks appear oversold after the recent sell-off, the indifference shown by US stocks on Friday to robust data on economic growth may cause concern.

Back home, benchmark indices on Friday managed to erase losses and ended marginally higher after the Reserve Bank of Indias higher-than-expected hike in the cash reserve ratio spooked investors initially. Traders covered their short positions in the latter part of the session ahead of the weekend and the US GDP data announcement.

The movement of the US dollar against the rupee will be closely watched, as further appreciation in Americas currency could result in foreign investors extending their selling in emerging markets including India. A stronger dollar erodes the value of their assets in emerging markets that are held in the local currencies.

We remain bullish on growth and bearish on risk. Fears over indirect US policy on the financials have undermined sentiment at the same time as risk measures have peaked. Strength in the US dollar has reflected this short-term risk aversion, said Sean Darby, Asia strategist, Nomura International.

Foreign institutional investors have dumped Indian shares worth over Rs 10,000 crore over the past couple of weeks, according to NSE data. Bank shares are likely to remain weak this week, as the CRR hike last week will suck out almost Rs 36,000 crore from the banking system.

The sharp CRR increase will result in a marginal increase in lending rates. Bankers will either take a hit (it is possible because in this quarter, most banks reported expansion in NIMs) or pass on to their clients (difficult because, most sub-PLR clients will then switch to other sources), said Prateek Agrawal, head-equity, Bharti AXA Investment Managers. Hence, it is expected that the margins of banks will fall in bit from what was expected earlier, he added.