Delayed monsoon, plunging rupee to keep market on edge

MUMBAI: Stock investors, already spooked by the uncertainties surrounding the eurozone, may have to deal with a fresh set of concerns in the week ahead: delay in the monsoon and a renewed decline in the rupee.
Expiry of the June derivatives contracts on Thursday could also result in some sharp gyrations in the market as traders shuffle their positions, keeping investors on the edge."Monsoon is one of the key risks for the market right now even though it is too early to know how it will pan out," said Mehraboon Irani, head - private client group at Mumbai-based broker Nirmal Bang.
The Indian Meteorological Department on Friday downgraded its rainfall forecast for the ongoing monsoon and said heavy rainfall could be expected by mid-July. Monsoon showers directly affect India's rain-fed agricultural sector, indirectly influencing rural demand and food prices. Investors are worried that besides lower agricultural production, a poor monsoon could create inflationary pressures and force the Reserve Bank of India to keep interest rates high. The market will watch out for signals from the government on who could be the next finance minister once Pranab Mukherjee resigns on June 26. Traders will also keenly follow developments in a Eurozone summit later in the week to look for indications of monetary easing in the common currency area, which could ease worries in both the stock and currency markets.
"Global markets could rally if European leaders approve a financial stability mechanism in their meeting," Irani said. During the European Union summit, Eurozone leaders are also expected to deliberate on using the European Financial Stability Facility, or EFSF, to buy sovereign debt from secondary markets.
"Markets would keep a close eye on the European Union summit... in case concrete measures are not announced, then it can cause further sell-off in risk assets and a rally in the US Dollar," said Anindya Banerjee, senior manager - currency derivatives research desk at Kotak Securities in a note. The risk-aversion could accentuate if the EU summit fails to come up with measures to mitigate the crisis in the currency zone, further threatening a decline in the rupee, analysts said.
"Markets seem to have so far ignored the fall in the rupee, and there wasn't much outflow despite the depreciation. However, the decline in the rupee doesn't augur well for the medium term, especially with risk-aversion globally continuing to support a rise in the dollar," said Dhananjay Sinha, co-head institutional research at Emkay Global. High demand from oil and gold imports pushed down the rupee, which touched record lows of 57.32 against the dollar, and declined over 3% in the week. Technical analysts said Nifty could trade in a range of 5015-5150 in the absence of any significant triggers.
"There is a strong support between 5015 and 5075 as we believe there is strong buying at these levels. This was also seen when the RBI did not cut interest rates, and the market did not crack 5064," said Dharmesh Shah, technical analyst at ICICIDirect.
"It is almost as if the market is absorbing all negative news without falling too sharply. Positive triggers could lead the index to 5350," he said.