Sensex fell 97 points to settle at 36,227 levels for the week gone by, with the metal and realty index registering a sharp drop. The markets have been on a downward spiral for the last one week as the IL&FS default saga continues. Many a book can be written on how an AAA rated government infra major can become a default company in one month. The IL&FS default and outflows from debt mutual funds triggered fears of a potential liquidity crisis in money markets, making it extremely difficult for Non Banking Finance Companies/NBFCs to raise fresh money. This extreme volatility in the debt market has led to influencing investor behaviour in equity valuation of these NBFCs. The stock markets have been volatile for the month of September on the back of selling by the foreign portfolio investors, with support coming in from domestic institutional investors. Sensex has seen a whopping 2,000-point decline, while the other brethren Nifty has gone down by nearly 700 points and counting. To ensure that the bond markets remain calm and liquidity remains comfortable, the government on Friday said that it would borrow a lower amount than what it had earlier planned for the second half of the current financial year. A few other Monetary measures announced by the government calmed the bond yields with it closing at 8.02% levels. The lower borrowing program announced by the government is on the back of higher collection it expects from the recent upward revision in the small savings rate. It could borrow more from the National Small Savings Fund pool account in case the situation arises. An event which market men would keenly watch is the RBI Monetary Policy review on 4 October next week. Most analysts are expecting the Monetary Policy Committee members to raise the repo rate by 25 basis points, from 6.5% currently. This revision is on expectation of growing risks to medium term inflation, even though consumer price inflation could remain soft. The overall market outlook is a little cautious as volatility may continue in the near term on the back of shrinking volumes, rising USD, elevated crude oil prices, global trade wars, upcoming state elections and reduced inflow from mutual funds. We would suggest investors to stay out of the markets for the next few days and wait for the tussle between the bulls and bears to end soon. Hence, we suggest investors to stay in cash for the time being and wait for events to unfold.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.