This first appeared on www.birdinfostock.blogspot.com in the month of june 06
The Nifty demonstrated that it will not allow excesses on either side and closed the week with slight gains. I may remind you that the range of 2700 to 2900 seems to be limiting for Nifty for up to the time when the quarterly results would be out. The Nifty has been given support by IT sector scrips in beautiful way and the key lies in the fact that the dearer interest rates do not adversely affect IT companies, which not only finance their own expansion but also are sitting on cash. This has made them less vulnerable but at the same time please be warned that the smart money is moving out continuously and this sector will not be well placed for long term rewards.
I have talked about the effect of interest rates on indices, which keeps them in vice like grip. There is empirical evidence in hand now. I invite you to carefully understand the numbers and the relation ship they have .The inflation was about 2% in Jan 02 and G-Sec Yield was around 8% meaning real rate of interest @6%.BY 2003 beginning the inflation moved up to 4 to 6% range and remained so till end of 2005.During 2003 ,2004and 2005 the interest on G-Sec came down and remained in the range of 4 to 6% and there after started to move up and is presently placed at around 8%.The inflation stands at 4.72% for the week ending 17 June 06.Juxtaposing these numbers with the march of indices, we clearly see the corelation.While in 2002 the markets were down and flat, they kept touching newer heights all the while during 2003,2004 and 2005 because the inflation and interest rates were almost at par and the real rate of interest was almost nil.
Suddenly, the over enthusiasm tried to keep the indices at higher level but had to give way and the six months after 2005 have remained in turmoil on account of ignoring the opposite movement in inflation and interest rates signifying that real rates of interest have gone up. Here I may add that the domestic interest rates and inflation rates have higher bearing than the FII money movement in the medium term, as this movement is the result of expected corporate performance, which in turn is mostly based on the real rates of interest.
The fact of higher real rate of interest may dent the profitability of corporates but it shall not affect the well-managed companies to raise capacities and improving upon the level of efficiencies in operations. The case of Tata Steel is a good example. It suffered in monetary terms in the intermediate year but at the same time kept adding to capacities and kept cutting the costs and then came the good times and see how handsomely the investors have been rewarded during last four years. We have to look for such companies but we have to look at the price we pay as I keep saying that even gold may be bought too dear. To identify more such companies, here comes the need to use the Stock Market Vedic Theory based on Panch Tattva. For this, you should check our daily advice.
18 June 2006