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Market may weaken further
June, 05th 2008

Amidst extreme pessimism, a minor pull-back is not ruled out. But, any rally should be looked at a chance to lighten positions

The Government finally managed to muster up enough courage to hike retail prices of petrol, diesel and cooking gas. (Kerosene of course was exempt and will add to the joy of adulterators). To limit the burden on consumers, the Centre has also slashed customs duty on crude and petro products besides trimming the excise duty on petrol and diesel. But, all this may be a case of too little, too late. At best, it will provide a lifeline to the PSU oil marketing companies for some time. A long-term solution to the perennial problems of India's highly politicised oil sector continues to elude us.

In an unprecedented (perhaps a desperate) move to pacify the people, the Prime Minister went on air to explain the rationale behind the move. He is also seeking a long-term solution rather than saddle the Government and oil companies with the majority of the burden. As usual, the Left parties, and the BJP slammed the Government's decision. Even the RJD, very much part of the Congress coalition, has called for a rollback. If the political temperature continues to mount, there could be a small reversal in the fuel price hike.

Coming to the markets, the much-awaited announcements didn't cut much ice with the investors. Even the shares of OMCs gave up most of their gains by the end of the day. Though the price hike and other measures will provide some relief to OMCs, they will still be in considerable pain. What's more, the fiscal situation is also likely to worsen. Inflation is soon expected to hit double-digits. Companies in sectors like Auto, Aviation, Cement and Steel will be hit the most. Banks will also be affected as higher inflation will lead to more monetary tightening.

To add to the macro-economic woes, we have the fresh concerns over the global front. There are talks that Lehman Brothers could report losses and will have to raise fresh capital to stay afloat. Two of the biggest US bond insurers may have their ratings cut by Moody's. Though oil prices have cooled off substantially from US$135 per barrel, they are still quite high. The US economy may have avoided a recession (only technically though), but it's not going to gallop either. Also, Federal Reserve chief Ben Bernanke has hinted that the central bank may not increase rates any further.

Given the slew of negative factors, we expect the market to remain under pressure in the near-term. There are more chances of it falling than rallying from here. Technical and F&O indicators too are negative. FII selling has accelerated in the past few days. So, the bulls appear to be cornered from all fronts. Amidst extreme pessimism, a minor pull-back is not ruled out. But, any rally should be looked at a chance to lighten positions.

FIIs were net sellers to the tune of Rs11.99bn (provisional) in the cash segment yesterday while the local institutions poured in Rs4.2bn. In the F&O segment, foreign funds were net buyers at Rs3.35bn. On Tuesday, FIIs were net sellers of Rs9.52bn in the cash segment. Mutual Funds were net buyers of Rs1.24bn. Fortis Healthcare and HOV Services will announce their results today.

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