Inflation, interest rate fears may continue to take a toll

Equities: The market continued its downward trajectory with the BSE Sensex ending down 4.22% during the week to close at 18860. The lower than-expected third quarter performance of IT leader Infosys disappointed investors. Currently, there are a number of factors which continue to worry the broader market. • Rising commodity prices are increasing inputs costs for companies, thereby putting margins under pressure. • Secondly, rising inflation and interest rates are reducing consumer’s purchasing power. This could hit growth. • Finally, while 2010 saw record capital flows from FIIs, a repeat performance is yet to happen. Investors are betting on a recovery in the US which could mean lesser flows to emerging markets like India. “All these factors put together could make the market correct a further 5-7 % in the coming days,” says K Ramanathan, CIO, ING Investment Managers . With the onset of the result season, analysts are likely to watch out for guidance from key corporates before they decide their next course of action . Debt: Food inflation moved down marginally from 18.32% in the week ending December 25, 2010 to 16.91% in the week ending January 1, 2011. It has now become a matter of concern for the finance minister who has assured that he will take corrective measures to reduce prices. There is little choice before the central bank other than raising rates when it meets on January 25. Hence, fixed income investors should invest in liquid-plus funds or short-term bond funds in the near future. Gold: The charm has come off the yellow metal as investors fears over Eurozone’s ability to finance its debts have abated. Concerns that more European nations may follow Greece and Ireland, for a bailout, kept pushing up gold prices, boosting demand for the precious metal which is viewed by many as a safe haven. However , sovereign bond sales in Spain, Italy and Portugal have alleviated those concerns and acted as a dampener on gold demand. Locally, with the wedding season resuming, one could see slightly higher demand for the yellow metal in the coming days.