Markets rebound ahead of liquidity injection in Europe

Written by fe Bureau | Mumbai | Updated: Feb 29 2012, 05:32am hrs
Ahead of the second round of a three-year LTRO (long term refinancing operation) by the European Central Bank (ECB), the Indian equity markets rebounded smartly on Tuesday, retracing some of the losses made in the Mondays massive plunge.

Both the benchmark indices, the 30-share Sensex and the 50-share Nifty, which had lost close to 2.5% on Monday retraced 1.7% on Tuesday as traders braced themselves for another round of liquidity injection in the European markets which could prolong the momentum of foreign fund inflows into the Indian market.

The Sensex added 285.37 points to close at 1,7731.1 while the Nifty advanced by 94 points and ended the session at 5,375.5.

The Indian equity market have seen inflows of more than $7 billion so far in 2012 (including $2 billion on account of the purchase of shares of HDFC, sold by Citigroup), after the ECB cleared its first round of LTRO worth 489 billion euros in late December. The cumulative inflow into the debt and equity markets since the start of the year stands near $11 billion.

Investors are watching for the second round of LTRO. The quantum of refinancing would be a crucial pointer towards the amount of liquidity that could flow into the markets worldwide. How the rally unfolds would depend on the quantum of the refinancing. If the amount is less than last time, the rally may not be as strong, said Gopal Agrawal of Mirae Asset. Agarwal believes the more important event, from Indias point of view, would be the fiscal consolidation policy given higher crude oil prices.

Andrew Holland, CEO-Investment Advisory, Ambit Capital, said, Higher crude oil prices from here on could leave the RBI in a dilemma since the central bank is looking to further balance slowing growth and elevated inflation.

Even if RBI goes ahead with an interest rate cut in the near future, elevated crude oil prices could make it turn cautious and hold back rapid rate cuts, Holland observed.

Goldman Sachs also identified high oil prices as a risk for Indian equities and is underweight on the Indian market after raising the December 2012 target for the Nifty from 5,200 to 5,800. As a rough rule of thumb, a $10 increase in crude oil prices, raises the current account deficit by 40 basis points and pushes up headline inflation and the fiscal deficit by 50 bps and 30 bps respectively, the report says.