What will drive Indian markets?

Mon, 26 Apr Pre-Open

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"Where do you think the markets are going over the next few days?" This is one oft-repeated question that you must be hearing, or asking, these days. We are also asked this question many times from those who write in to us. And our answer is always the same - "We have no idea."

Sure, we can make a guess. But our chance of being right would be about the same as anybody else's. What we can do is look at is the factors that can impact the markets positively or negatively in the short term. But that's all about it. Which factor will impact the markets more and which will impact them less is something that we can never predict with certainty. But let's try!

One factor that we think will impact Indian markets in the next few weeks is the March quarter result season. As it seems now, this quarter is likely to pan out better than the past few quarters. And it's not just about a lower base of the weak last year. Indian companies are seeing a gradual recovery in their businesses. Profits are also on the rise. And this time it's not just due to cost cutting. Companies are also seeing rising sales on the back of rising consumption. Investment demand is also picking up pace.

Overall, things look good for Indian companies as we see now. And that's good news for stock prices.

However, one factor that can cut short this recovery is the rising interest rates. With inflation not showing any signs of cooling off, higher interest rates is the only option left with the RBI. The RBI has already raised its key interest rates. But it has done this is small pieces while keeping a close tab on inflation. If food and non-food prices continue to rise the way are rising now, the RBI will have to take big steps to cool them down.

This we believe can impact profits of companies that have high debt on their books. Some of these are from high growth sectors like real estate and retailing. Companies from the power sector that are mandated to fund their expansion on a debt/equity ratio of 70/30 will also feel the pinch of rising interest rates.

As such, it is important for you to stay away from companies that have high debt on their books. Certain companies can mask their high debt levels by showing high growth rates in the short term. But this - high growth using high debt - is not the mantra for long term success. It's a toxic mix that can dent a big hole in such companies' performance during bad times. And you as an investor in them won't be spared either!