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Kargil helps speculators to take positions for the kill; investors turn cautious

V V L N Sastry in Bombay

The stock markets continued to react in a volatile way to the Kargil crisis. The BSE Sensex crashed almost 200 points or four per cent intra-day, but ended 89 points lower (2.3 per cent). The late recovery was as much on account of strong buying by the Unit Trust of India, the General Insurance Corporation and the Life Insurance Corporation as due to buying up on short sales by market players. The rupee made an unexpected recovery today, thanks to SBI's intervention.

On the bourses, the foreign institutional investors remained spectators. The FIIs are assessing the situation carefully: to exit at the prevailing levels will mean booking losses. They have bought several equities at higher levels in the recent past. There are indications that they may bide their time until the situation improves so that they can exit at renewed price levels.

The selling pressure is almost across-the-board, but commodity stocks are the worst hit followed by software stocks.

In the pre-Kargil phase, the markets were reacting wildly to the movements of the Dow Jones Industrial Index. But the Dow's 200-point slide had little impact on the Indian markets this week: the FIIs did not turn sellers, unlike in the emerging markets. It was the border row all the way.

May 28 being the last day of the weekly settlement on the BSE, operators unwound their long positions and preferred to stay fresh for the coming week. The market expects that the Kargil crisis will acquire definite dimensions by Monday.

Operators and punters were active today. And the software stocks bore the brunt of their unwinding. Tata Elxsi, KLG Systel, DSQ Software, Tata Infotech, Rolta India, Silverline Industries, Orient Information, Pentafour Software and CMC were among the prominent counters that declined today.

However, the decline of software shares is unwarranted. For software counters, most of them export oriented units, stand to benefit from the rupee depreciation and steady overseas demand for their services.

Commodity stocks also declined. Leading counters that touched lower limits of the circuit-breaker were HPCL, IPCL, State Bank of India, EIH Limited, Madras Fertilisers, Hindalco, HLL, HDFC, Birla 3M, Novartis, German Remedies, Arvind Mills, ONGC, Oriental Bank of Commerce, Raymond's, Tata Power, Indal, Mahindra & Mahindra, Siemens, Voltas,Cochin Refinery, Sterlite Industries, Aurobindo Pharma, Zee Telefilms and Larsen & Toubro.

Reliance Industries, Telco, Tisco, HLL and ITC were found to be weak today.

Marketmen believe there will not be a war but a war-like sentiment may prevail for the next few days. International attention and wide media coverage of the Kargil crisis are expected to offer perfect conditions for guessing games and wild speculation.

However, the market movement will be a function of the FIIs' buying/selling. Their decision will of course be dictated by the intensity of the border tensions. If the situation does subside by Monday, the opening day of the new settlement will witness mixed results.

But if the Kargil crisis worsens, the FIIs and hedge funds will exert selling pressure. This will push the major indices back to the pre-rally levels by next weekend.

However, a few marketmen feel the FIIs may adopt a medium-term view, perceiving the Kargil crisis as a passing phenomenon. They may infuse further interest by fresh buying, pushing up prices, which in turn might help them to find suitable exit levels later.

Investors would be well advised to remain cautious; in fact, there were signs of investors turning cautious towards the end of the day's trading.

The writer is vice-president and head of equity research and investment banking, Khandwala Securities, Bombay.

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