Indian Markets likely to be volatile on monday

Market in the coming week is expected to move along with the Global Cues and also will remain volatile until SEBI's meeting on P-Notes coming Thursday.

Even through the Indian Economical factor looks promising the Global Cues can dampen the growth trajectory of India.

On Friday, Dow closed down almost 367 points on fears about credit and housing sector, earnings, record-high oil prices, slide in dollar.

The run up in oil prices was also significant in that it revives fears about whether it will drive up inflationary pressures enough to limit the Federal Reserves ability to cut interest rates further, even if the economic growth deteriorates enough to warrant more cuts.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than 5 to 1 on volume of 1.79 billion shares. On the Nasdaq, decliners topped advancers 5 to 1 on volume of 2.41 billion shares.

Last week, it seemed market did not like SEBI Curbs on participatory notes to make investment flows transparent. This move by SEBI is good on a longer run for Indian markets as P-Notes accounts for a major portion of the speculative market. This curb will in turn move Indian markets into fundamental trading.

P-notes, an offshore derivative instrument which has Indian stocks as underlying, are issued by FIIs to anonymous overseas investors. More than 30% of the capital inflows into the country’s capital markets are through the P-note route.

A steep fall on Monday may also auto exercise the margin calls, if there is further unwinding of positions by FIIs. Margins calls are triggered when brokerage houses (and stock exchanges, in extreme situations) unwind their clients leveraged exposures in the market to meet margin requirements when prices fall sharply.

Second quarter results announced by many companies this week have not been very stunning, though they are in line with market expectations. Reliance Industries, India's most valuable company, posted 28% increase in net profit. However, software companies bore the brunt of the strong rupee as Infosys results failed to keep up with expectation's of analysts. The upcoming week will see other IT majors such as Satyam along with heavyweights Tata Steel and ITC announcing their results.

On the other hand, The dollar is going to be under pressure against the yen as the growth outlook in US looks weak. US investors get funds in countries with lower borrowing costs and buy assets in nations with higher rates. Japan being a low borrowing cost country significant amount of the fund flowing into the emerging markets is borrowed from japan. The rising yen against the dollar will make FII's to sell securities from emerging markets to offset the dollar pressure.

At the time of writing this note the Japanese markets were trading down 490 points.

Forthcoming events to watch

1) Oct 25th SEBI meeting on P-Notes
2) Oct 31st FED rate cut decision and economy outlook

Investors are advised to sit on cash and track the global markets to see the stock market moments.

Info: Oct 22nd Marks the 20th anniversary of Black Monday in US markets, where the US indices fell 23%. Hope history does not repeat when the market opens on Monday in US.

- Srivatsan Srinivasan