The market moved in to a bit of a corrective mode recently with higher inflation numbers coming out week after week and also due to some amount of bounce in crude prices once again, which breached the USD 120 per barrel mark recently. The bearish stance of the FIIs on Indian equities also weighed on the market. FIIs, until now, have been net sellers in equities by around Rs 1000 crore in August. Mutual Funds too have been net sellers in equities in August by a little less than Rs 1000 crore as per figures available on August 22. 

 Inflation based on the wholesale price index stood at 12.63 per cent for the week ended August 9, which is the highest in the past 16 years. It is being anticipated that the RBI would hike interest rates further in its forthcoming meeting on August 30 and inflation would peak out in the range of 13 – 13.5 per cent. The expected rate hike would most probably be the last one in the current cycle. Any further rate hikes henceforth in the near term could materially impact industrial and economic growth, which the RBI would not want to happen. 

In the Q1 FY09 corporate results, there were already signs of an impact on the bottom lines due to high raw material and input costs and higher cost of capital. An earnings growth of 11-13 per cent in FY09 is being projected. The market is currently trading at 14 and a half times FY09 forward earnings and looks fairly valued. However, the valuations look appealing in terms of FY10 estimated earnings and investors initiating long positions can expect a 20 per cent upside from the current levels. 

The global cues in the last fortnight have not been very positive. There was news that the government would have to nationalize bond insurers Fannie Mae and Freddie Mac, which are among the largest bond insurers in the US. The two institutions, which have a mortgage portfolio of more than 5 trillion US dollars, have been badly hit by the credit market crisis that the US is undergoing. Their nationalization would lead to a wipe out of shareholder value.

 The crude prices at sub USD 120 per barrel are now well below the all time high level of USD 147 per barrel. This is due to an increase in supply by the oil producing nations, and also due to a reduction in demand as we witness some amount of relative global economic slowdown.

In the short term the market is expected to be range bound. The Sensex could drift in the range of 14000 and 15000.