Nirmal Jain
CMD - IIFL

We have just ended a nervous November, with just about everything going awry.  Global events are beyond our control, and all we can do is to wait and hope for things to improve.

Let me touch upon the matter of currency first. The rupee has depreciated in an unexpected manner, breaking a decade-old trend of staying in the 40-50 band against the dollar. The close to 20% depreciation in less than 3 months has happened at a time when we have not really witnessed heavy FII outflows.

The market sentiment has turned extremely bearish.  Besides the weakness in the rupee, there is infirmity everywhere else. The IIP has decelerated sharply to just 1.9% YoY in September 2011 from 3.6% (revised downward) in August 2011. This is the slowest pace of growth in IIP since September 2009. Sequentially, the IIP declined 0.7% MoM (seasonally adjusted), marking the 3rd consecutive sequential decline. WPI inflation for October 2011 also remained unchanged from September 2011, at 9.7%. These headwinds justify the bearish sentiment prevailing all around to an extent. The Q2 GDP data will be eyed keenly to reconfirm the prevailing situation.

I often hear people talk about the double dip. In my opinion, the single dip of 2008 has continued. There may have only been some corrections or some false signals of recovery from 2008 to 2011. A lot of changes have happened since 2008, and mostly for the worse – rising interest rates and falling capex levels in both the private and the public sector, even lower than what it was in 2008, to mention a few.

The political scenario is worsening. However, if the reforms roll, then the markets could also be on a roll. The initiative taken in terms of FDI in multi-brand retail is a welcome move for the sector, which requires heavy investment to expand the front-end as well as the back-end. Of course, given that there are over 30 bills for the Parliament to approve in the current session, we will have to wait and see what major reforms the govt. is able to push through.

The earnings season passed off without much to celebrate. In fact, when companies like Infosys say that they will not be able to meet the higher end of their conservative targets, it becomes a cause for concern. Banks, in particular, are facing tremendous pressure. This will continue in the next two quarters in terms of provisioning for NPAs (non-performing assets or bad loans) and also in terms of rising interest rates impacting the valuations of their investment portfolio. Also, the credit offtake has slowed in the broader sectors.

The FMCG sector has been living up to its reputation of being defensive. Most of the other sectors are facing a margins squeeze because of the interest increase on the one hand, and commodity prices losing form on the other. Retail participation in the stock market remains abysmally low. People are expecting more bad news or uncertainty, which is why they are holding back any investments in equity.

The main indices are hovering at 15800 levels, and have been tested a few times at these levels. If the confluence of bad news continues – from Europe or on the local political front – I won't be surprised if our market cools by a further 10%.

Now, a lot depends on how logically and quickly the central bank and the govt. can try and stem the rot that has already taken root. A pause in rate hikes is high on the list of expectations. I would think a bigger question would be, “When will the rate cuts start?” That could possibly be a positive trigger. Secondly, the policies the govt. comes out with for the infrastructure sectors (to which our banks have a huge exposure) will have to be closely watched. I think that if there are pragmatic policies, particularly from the central bank as well as the govt., things may start looking a little better next year.

UNEXPECTED DOWNTURN
•    The rupee has depreciated in an unexpected manner, breaking a decade-old trend of staying in the 40-50 band against the dollar, at a time when we have not really witnessed heavy FII outflows.

OVERALL WEAKNESS
•    The market sentiment has turned extremely bearish.  Besides the weakness in the rupee, there is infirmity everywhere else.

LIKELY TRIGGERS
•    If the confluence of bad news continues – from Europe or on the local political front – the market may cool by a further 10 per cent.