Settlement in the futures and options segment and truncated week will keep the equity market volatile this week but in a broader range. The market remains closed on Wednesday on account of Holi and on Friday due to Good Friday.

As the March series contracts in the F&O segment are expiring this Thursday, volatility will remain high during intra-day on the bourses.

But the key worry for analysts is on the political front. At a time when India is battling it out on economic front with investors looking for greater reform initiatives and solid policy actions to fix the widening current account deficit, Dravida Munnetra Kazhagam, a key ally of the ruling Congress-led United Progressive Alliance, withdrew its support.

Analysts fear now that the reforms and pro-growth measures may take a back seat due to the political rift. Though Finance Minister P. Chidambaram and Parliamentary Affairs Minister Kamal Nath emphasised their resolve to push ahead with reforms, analysts are still sceptical.

Brokerage firm Religare said: “Amidst rising macro-economic uncertainty and still significant risk on India’s twin-deficit problem, the possibility of a potential sovereign downgrade has not completely mitigated. As such, we believe the Government would not delay its reform push agenda especially so far ahead of the 2014 general elections.”

Another fallout due to political rift could be capital flows. Foreign institutional investments have been strong despite India being accused of policy inertia and corruption. Any increase in uncertainty will push FIIs to press the sell button that could have cascading effects not only on equity markets but also on the currency markets and economy as well.

The RBI’s hawkish stance will continue to hurt sentiment. The central bank, while decreasing the short-term lending and borrowing rates by 25 basis points last Tuesday, said: “Even as the policy stance is on addressing the growth risks, the headroom for further monetary easing remains quite limited.”

Morgan Stanley believes that monetary policy has a limited role in reviving growth in the present cycle. It said: “We expect the Government to continue to take policy measures to slowly improve productivity growth and growth mix. The initial phase of recovery will be driven by an improvement in productivity growth rather than a big rise in headline GDP growth.”

Besides weak domestic cues, global factors will also weigh heavily on the bourses, particularly after last week’s events in Cyprus. Global markets suffered heavily after Cyprus said it was planning to tax bank deposits as part of a €10-billion sovereign bailout deal.

Cyprus, which attracted investors from many countries due to its treaties with them on double taxation, will have to make hard choices to avert a bankruptcy.

>badrinarayanan.ks@thehindu.co.in

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