The Hindu Business Line : Fund flows to dictate direction

THE Dalal Street is in a purely liquidity driven mode. The fundamentals have taken a back seat. Each day, the market direction is being dictated alone by the movement of money. This state of affairs is likely to continue this week too.

The overseas fund drizzle has turned into a torrent. June saw one of the biggest net foreign portfolio investments in the local equities, over Rs 5,000 crore.

Last week, FIIs were particularly flamboyant. In the first four days, their net investment figure touched Rs 1,922.60 crore. The local mutual funds are predictably continuing to be the net sellers.

Robust flow: The benchmark indices owe their present uptick to the overseas valuations. Fluctuation in flow could also be correlated to the individual stocks in the baskets of the key indices to a great extent. Market players have tended to conclude that variation in money allocation would determine the prices of frontline stocks. The stocks beyond the baskets of benchmark indices are, however, being assessed more in terms of fundamentals than the additional liquidity flooding the market. Some of the mid- and small-cap shares are also seeing fresh or increased attention from the overseas investors. Hence trading interest in the mid- and small-cap space rules strong.

If for some reason, money flow grows or slows down intra-day, speculative and trading interests are quick to pick up the thread. Primarily, it is a one-track investment or speculative strategy that at work. The contrarian calls are conspicuous by their absence.

In this kind of a situation, news that have bearing on the economic fundamentals or the numbers of a particular company or a sector get sidelined only to be picked out later as an excuse for price movement according to convenience.

If there is a correction in the benchmarks, it would for sure be dubbed as a consolidation. The market sentiment has lost its hypersensitivity to oil price or interest rates movements for the time being. The rate of inflation or the partial disinvestment in BHEL, or progress of monsoon or reports of flood damages seem to have lost much of their impact on the current market mood as everyone is keyed onto the slice of the emerging market melon that is coming India's way.

Where the next bout of buying is coming to is the question on all market persons' lips. Bets appear to be high on banks, sugar, media, smaller pharmaceuticals and oil exploration stocks. Metals seem to be out of fashion.

Real flood: Prime Minister's reminder last week that the agriculture sector will continue to under-perform has not had any impact on the market. Dr Manmohan Singh signalled an alarm on the water management, flood control and agricultural growth. Amid flood reports from Gujarat, the present Government in Bihar adhering to the report of Task Force on Floods (2004) has ordered embanking rivers all over the state by sandy soil.

Experts feel such attempts would be proved useless as they had been in the last five decades.

Dalal Street hardly responds to such far reaching but long-term elements of macro economy. It tends to recognise the economic fundamentals when money does not flood the market.

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