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October 2011

The domestic equity markets remained range bound in September with the S&P CNX Nifty declining 1.2% in the month. Most other global indices however saw steeper declines driven by fears of the Eurozone debt crisis and worries of a double dip recession in the west. The primary disappointment for the domestic markets in the month was weak global cues in the form of slowdown worries in the US and deteriorating debt crisis in the Europe. Worries of slowdown in the domestic economy amid rising inflation and interest rates added to the losses for the Indian markets. Selling by FIIs on worsening global outlook and the consequent risk aversion to investment in emerging markets added to the downfall for the markets. FIIs were net sellers to the extent of Rs 1,147 cr in September compared with selling of Rs 9,536 cr in August. Further losses were however capped on short covering and intermittent positive global cues in the form of an increase in bailout fund by Germany for the debt ridden European countries.

The returns of the sectoral indices were mixed. BSE IT was the best performer with 4.2% returns due to depreciation of rupee against US dollar which is expected to have a positive impact on the IT sector as majority of its revenues come from the US. The rupee depreciated by 6.6% in the month against the US dollar driven by rising demand for dollars due to rising repayment pressure on external debt held by private companies and short supply of dollar due to FII outflow. This sharp depreciation of the rupee against the US dollar will dent the financials of companies with a high proportion of foreign debt due to recognition of mark-to-market (MTM) losses on the outstanding loans. We have revised the outlook on rupee from the earlier forecast of Rs. 43-44/USD to 45-46 (Rs/USD) by March 2012. 

Among other sectoral indices, BSE Capital Goods was the worst performing index with a decline of 10.8% on the back of disappointing IIP data for the month of July which grew at 3.3% compared to 8.8% in June.  BSE Metals gave negative 9.1% returns due to decline in commodity prices as expectations of a Greek default caused panic about a possible sharp slowdown in global demand for industrial metals. BSE Power posted negative 4.8% returns due to issues related to land acquisition and shortage of coal.

The FII investments and the movement of rupee against dollar remain under focus as additional global cues emerge over the next month. The Q2FY12 results, to be declared in October, are expected to be muted due to lower revenue growth (q-o-q and y-o-y) and 100 basis points (bps) reduction in EBITDA margins driven by slower volume growth, along with high input costs and rising wages. The Indian markets will continue to be driven by global developments over the next month. We expect the S&P CNX Nifty to trade in a tight range of 4,700-5,200 (BSE Sensex 14,100-15,600).