Euphoria versus politics is going to dictate the market direction this week. Only politics (or bad politics) can ground the upbeat mood on the Street. If the Government manages to ward-off the threats emanating from within its own allies and supporting parties, the market will remain on firm footing during this curtailed week.

The market will remain closed on Wednesday on account of Ganesh Chaturthi.

With the Government doing its part on reforms, now all eyes are on the Reserve Bank of India's mid-quarter review of the Monetary Policy on Monday. There is an air of optimism among traders that the RBI might actually announce at least 25 basis point cut in interest rates. However, inflation at 7.55 per cent in August – much above the central bank's comfort level – has given little headroom for RBI.

Another crucial trigger for the market is the advance tax numbers. Individual stocks will behave according to the tax they paid. According to reports, both public sector and private banks have paid higher advance tax while Reliance Industries and Tata Steel have paid less. FMCG companies have also committed higher tax.

Foreign institutional investors’ increased activity also augers well for the Indian equities. They gave thumbs-up to the Government’s reform initiatives. The decision to increase diesel price alone brought about Rs 2,800-crore (net inflow) FII funds on Friday into Indian markets.

If the Government maintains the reform momentum, inflows from foreign soil will escalate in the coming months. Given the enlarged liquidity pie, thanks to the European Central Bank and the Federal Reserve’s decision to stimulus their economies through easy liquidity, most of that money will see India as safe bet. FIIs have so far put in Rs 66,000 crore this year.

Market is hailing the liquidity flow, but the same could pose a bigger threat to India in the form of inflation. Commodity prices will go up, despite recession in most countries. Already, gold and crude oil have appreciated significantly.

Oil futures for October delivery is hovering near $100 on the New York Mercantile Exchange. Brent oil, which is the benchmark for Indian oil companies, is ruling around $117 and heading towards $120 a barrel on the London-based ICE Futures Europe exchange. Spot gold is ruling $1,769.93 an ounce. Industrial and basic metals such as zinc, copper, lead, nickel and aluminium all jumped close to 4 per cent after the US Federal Reserve opened its purse.

If they continue to sustain these levels, even the recent hefty hike on diesel price would not be sufficient to bridge the current account and fiscal deficits. Even corporates will face headwinds as input costs will remain at elevated level.

>badrinarayanan.ks@thehindu.co.in

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