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Monday, Dec 12, 2005


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As liquidity dries up — Volatility, profit taking may check bull run

Jayanta Mallick

THE local bulls appear set to make a directional call for the Dalal Street. Despite strong volatility and profit booking tendencies, the benchmark indices took an upward move primarily because a section of market players pressed for strong index basket buying in the cash market last week.

Overseas investors and domestic mutual funds were clear sellers. Even if it is assumed that FIIs lent a net buying support on Friday (SEBI data would be available on Monday), there is hardly any doubt that the domestic market makers pulled out all the stops to place the Sensex above 9,000 points.

Liquidity concern: Improvement in traded volumes and the market breath in the past week have brought back a sense of momentum too. Many of the mid-cap stocks are also hovering around their yearly peaks.

For the bulls, the worrying factor is the current slowdown in the liquidity flow from abroad. Fresh flow of money, mainly from the US, is not forthcoming. An upward bias in the Indian interest rates is sited as the reason for a lull in the interest in the Indian equities.

But elsewhere - West Asia, Australia and East Asia - attraction for Indian capital market is definitely growing. However, a reflection of that would take a few weeks to be manifested on the Street. Until then, only a strong momentum can draw fresh overseas flow. Though domestic liquidity is theoretically sufficient to run the market engine, a large chunk of it is waiting outside the ring.

NSE warning: This week, the bulls would seek to raise the sentiment further and resist the downside. But volatility is likely to dog them. Opportunity for profit taking would tend to suck in more funds to maintain the level in the benchmarks. This, in turn, is likely to put pressure on leveraged trading.

Interestingly, the NSE warning to members on Friday against entering into financing arrangements other than permitted by margin trading norms may have some impact on the leveraged trading in the market.

The exchange has discovered certain financing arrangements through which, under a general authorisation, brokers receive and transfer the securities and funds of clients routinely to and from joint accounts of financiers and clients. The exchange has also found instances of brokers operating clients' bank and depository accounts under a financing arrangement. Though the exchange has asked brokers to wind up such arrangements and end the practices before February 10, 2006, observers feel the move is likely to tighten liquidity situation in a short run.

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As liquidity dries up — Volatility, profit taking may check bull run

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