Interest Rate Reduction Crucial For Equity Markets

• Nifty at a low
  After making a low of 4530, the Nifty has made a still greater low of 4770. This, on a weekly basis, is encouraging for the bulls in the Indian markets.
• Interest rate scenario
  The RBI has started cutting rates, which is encouraging for the equity markets. However, inflationary pressures are not leaving enough room for more liquidity easing.

The Indian equity markets were reeling under selling pressure for the whole of 2011. However, the start of 2012 brought in fresh buying interest. After seeing a low of 4530, the Nifty has made a still greater low of 4770. This, on a weekly basis, is encouraging for the bulls in the Indian markets. Further, for CY12 (YTD), FII investment in the cash segment is positive. However, the rising dollar rate is one of the factors that is very disturbing. Nevertheless, for value-based long-term investors, such types of markets provide immense opportunities. If you observe the indices of other emerging markets, just like Nifty, they too are in the process of base formation.

It is generally observed that during tough times, competent managements put in enormous efforts and creativity to cut costs and maintain margins. No doubt, we could see weak revenues and earnings growth in Q1FY13. The weakness in corporate results could arise from high inflation, a subdued global demand scenario and higher dollar rates versus the rupee.

The RBI has started cutting rates, which is encouraging for the equity markets. However, inflationary pressures are not leaving enough room for more liquidity easing. It needs to be seen how the monsoon behaves in the coming weeks to understand how agro-production would pan out. Further, higher prices of metals are keeping a check on the input costs. A sharp correction in crude oil prices will definitely have a positive effect in terms of lower import costs at a macro level. Overall, if all this helps in lowering inflation, we could see some more liquidity easing measures from the RBI.

The rupee-versus-dollar movement does have a significant impact on the equity markets and the economy as a whole. The dollar rates could correct, and it could move towards its 200 DMA (day moving average) support level near Rs 52. This could bring in much-needed cheer to the equity markets. At the macro level, softer dollar rates enable cheaper imports mainly of crude oil, which is a large component of the overall import bill.

The US employment data that came out recently was pretty weak. The Chinese economy too is showing signs of slower growth. In such a scenario, stimulus from the US Federal Reserve and monetary easing from China could give a boost to equity and commodity markets across the world. It is observed that to boost growth, the government is usually left with little option but to add stimulus. Stability in the Euro zone could also impact the market sentiment positively.

In the current scenario, sectors such as Metals, Telecom and Banking are looking attractive for long-term investments. Any reduction in interest rates could generate buying interest in Realty stocks, which have been underperforming the broader markets for the past two-three years. Selective Large-Cap pharma stocks (especially the ones with a presence in the generics segment) could also see an upside from here.

Money invested in fundamentally strong companies (with high quality management) and at a price which is below its fair value levels is generally seen to deliver above average returns over a long-term horizon. Trading in equity markets requires appropriate skills such as identifying right entry and exits levels and an in-depth understanding of the subject of risk management. Thus, retail investors are advised to consult experts before investing their hard earned money in equity markets.