It's time to be cautious as Sensex nears 20,000 pts

Updated: Saturday, July 13, 2013, 12:00 [IST]

Indian markets rallied this week on positive comments from Ben Bernanke and a stellar performance by Infosys Technologies. It's all about Ben Bernanke these days and what he says. Fundamentals of the economy, however, continue to weaken.

The Index of Industrial Production (IIP) contracted by 1.6 percent in May, the lowest factory output in 11 months. On the other hand consumer price inflation inched up to 9.87 percent in June mainly due to rise in vegetable and fruit prices.

This is a double whammy. You have inflation which is rising and factory output which is contracting, making the task of the RBI extremely difficult in cutting rates.

With the wholesale price inflation date due on Monday any increase over April's level may increase the worry of the Reserve Bank. In fact, analysts are now even looking at the possibility of the RBI hiking rates if the rupee continues to fall increasing the risk of imported goods pushing inflation.

Against this backdrop markets seem to defy fundamentals. The rupee has not behaved and on Friday once again went past the 60 mark against the dollar only to gain again.

It's time to be a little cautious as the Sensex has run up sharply from 18,400 levels to the present levels of almost 20,000, while economic fundamentals have weakened.

In fact, analysts are now advising caution and to book profits on every rally. The earnings season has kicked-off with the Infosys results and the market is likely to be stock specific depending on how each company unveils its q1 2014 results.

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