Global market, economic data and corporate results to dictate trends

In the coming week too, like last week, the Indian equity market will take its cue from the global markets.  The US's employment related data has been below expectations for the second consecutive month. This is being interpreted as a positive sign for emerging markets like India, since it may pressure the US Federal Reserve to temporarily halt, at its next meeting in March, the quantitative easing process it began at the beginning of the year. (The US has reduced its monthly bond buying by $20 billion so far.)  

Thus all ears will be glued to what the new Federal Reserve chief Janet Yellen says when she appears before the US Congress on Tuesday, February 11 to get possible hints of the future direction the Fed will take. Again, on Wednesday, February 12, European Central Bank President Mario Draghi's may provide some insight into the kind of measures the bank will take to prevent the euro's deflation - which too will have a bearing on emerging markets.

There will be domestic factors at work too. On Wednesday, industrial production data for the month of December will be announced, as well as the consumer price index (CPI).rise for January. On Friday, the government will declare the wholesale price index (WPI) inflation. The market expects the index of industrial production to improve slightly, though it may remain negative - around minus 1.5 per cent in December as compared to minus 2.1 in November. Similarly it expects both CPI and WPI inflation to fall. The CPI is expected to be close to 8 per cent and WPI below 6 per cent.

This week will also see the last lot of quarterly corporate results for the December 2013 quarter. Among those whose numbers are due are some closely watched blue chip companies - Tata Motors, Tata Steel, Hindalco, Dr Reddy's Laboratories, Cipla, Coal India, BPCL, ONGC, State Bank of India, Mahindra & Mahindra, DLF and Sun Pharma. Their performance too will impact the equity market.

FII flows may have slowed during the last few market sessions, but overseas optimism about India remains. Despite dismal growth, high inflation, high fiscal and current account deficits and poor governance, India still managed a GDP growth of 4.5 to five per cent in recent quarters. Looked at in isolation, this growth is below par, but compared with many other emerging markets and the world overall, India is doing well and is expected to do even better. This is the reason why among the BRICS nations' markets, India's is still doing better than the others.

The Indian market continues to be liquidity-driven, and FIIs are its backbone. But this year domestic institutional investors (DIIs) will also play a crucial role. In 2013, India saw record selling by DIIs - net sales of $13 billion, which fortunately were offset by $20 billion worth of FII buying. But DII selling is nearly at an end, mainly because insurance companies, which are prominent among DIIs, will no longer face the redemption pressure they used to. In 2010, the insurance regulator changed the lock-in period for unit-linked insurance plans from three years to five years, which means many policies which would otherwise have been redeemed this year will now remain locked in for a longer period. For 12 to 15 months beginning March, major sell-offs by insurance companies are unlikely. On the other hand, fresh inflows are likely from insurance companies and mutual funds. Mutual funds account for one-third of the DII inflow.

However the pace of recovery will ultimately depend on the general election. A stable government at the centre after the election will be a key catalyst for the resurgence of the market. The Indian market may remain volatile until the elections but that gives an opportunity to build a strong portfolio.