The next three months are likely to see several forces playing on the markets which are likely to exert pulls on the markets on different sides. On one hand we are likely to see positive contributors towards the markets which will be in the form of improving earnings picture.

The third quarter results in general should be in line or above expectations. Companies are likely to benefit due to higher sales turnover as well as improving credit and as such lower interest expenses. There is likely to be pressure on some segments due to the sharp pick up in input prices, however the strong top line growth combined with controls on salary expenses should see the operating leverage play out well.

The other positive contributor is likely to be the continuously improving economic data in the form of Industrial Production which is likely to trend up towards the mid teens over the next few months. This is likely to be sustained even in the future as the growth of capital goods and industrial products takes over the initial impetus given by consumer products.

The contributors towards volatility and that which can exert downward pressure on the markets are likely to be the Union Budget and what it does towards stimulus withdrawal. It is a given that the excise duty rates are going to be increased if not across the board, at least selectively. This could create a short term negative for some segments of the market.

The huge disinvestment programme of the government could also be a dampener as it sucks out liquidity from the secondary markets. However it is good for those FII inflows which are desirous of playing the India story and that are largely directed towards the large cap size of the market and would like an entry with lower impact cost. The retail investors that have been largely missing in the first leg of the rally could also come back via these disinvestments.

The other negative factor and which is likely to induce volatility is likely to be the inflation numbers that are likely to trend up sharply till the middle of the year before evening out going forward. Given the rally in food prices and most metals the actual inflation numbers are likely to be higher than current expectations and will create pressure on the Central Bank to increase policy rates. However given the sluggish credit offtake this could be negative for the fledgling economic recovery. As such it will be a fine balancing act for the RBI. Generally in the past the RBI has been more hawkish than would be actually required (my view over the years), so lets see how it reacts this time.

Increase in primary inflation might force the hands of other central banks to also reaffirm their inflation fighting credentials while supporting economic recovery.

As such on an overall basis we are likely to move to a scenario over the next few months where there will be different forces at play on the markets and this is likely to increase volatility which has been subdued for the last four to five months mainly due to the fact that news flow in general was positive for the markets and the negative pulls were not many. Whether this heightened volatility is good or bad is debatable but I guess it is necessary to shake out the complacency that has set in lately.

It doesn’t matter what your intentions are or how high you set your goals, what you will be remembered for is what you accomplish”

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