The BSE SME index ended the week at 803.55 points up 27.14 points for the week ended 18 December, from the previous weekend. The strong surge was partly in line with expectations after the markets were relieved of a small hike in the U S Federal interest rates. The hike in U S interest rates takes the level to 0.5 per cent.
The Federal funds rate is the cost of borrowing of overnight reserve funds by U S commercial banking institutions. The result of the small hike now implied that dollar would remain as a carry currency.
However, the increase in rates now implied that there would be a flight of capital from emerging markets, in view of the higher interest on funds on U S dollars. In fact, that trend already appears to have begun. In Friday’s trade, the SME index actually dropped 6.66 points over the previous day.
Besides, the SME indices are also closely following the more liquid BSE Sensex that fell 285 points over the previous day. Among the companies adversely impacted include real estate stock on the SME platform, Sunstar Reality or SRDL. This stock remained the largest traded stock on the SME platform, fell to Rs 27.20, a drop of Rs 1.20 over the last weekend and was headed close to its 52 week low.
The total traded quantity on the last day of the week was 3.75 lakh shares. Another stock that also saw large trade volumes of 2.6 lakh share was health services Company, Looks Health Services Limited. However unlike realty stocks health services stock rose sharply from Rs 30.55 to Rs 36.80.
The short covering that had pushed up the markets on Thursday was over. Expectations are that the bearish trends in the markets would return soon. One reason for this was the expected continued fall in petroleum prices. Crude prices are already below $35 a barrel and International investment bank was released a forecast of $20 barrel in the medium term.
Low oil price may be good for the economy, but does not though augur well for Indian stock markets. The reason is that domestic funds have been reliant on foreign institutional investors operating out of West Asia, Dubai and Arab sovereign funds to ensure buoyancy in the capital markets. West Asian investors had raised investment resources through a method known as ‘Sukuk’ funding that linked returns to asset cash flows.
With the sharp fall in petroleum prices, flow of these Sukuk funds driven inflows could soon reduce to a trickle. The first to be struck by this kind of situation are the low liquidity markets, particularly SME stocks, analysts said.