India Markets Weekahead: Tough for Nifty to climb above 7,800

July 20, 2014

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Indian markets were unaffected by the week’s international developments, with some help from encouraging domestic macro data and a pep talk by Finance Minister Arun Jaitley in post-budget discussions.

The Nifty recovered from the previous week’s losses, closing 2.67 percent up at 7664. Positive IIP data was followed by benign inflation at 5.43 percent, a four-month low. Monsoon rains, which had been playing truant, recovered substantially with the deficit shrinking to 15 percent below average last week and covering the entire country.

The geo-political tension in west Asia as well as the shooting down of a civilian aircraft in the war-torn region of Ukraine did not affect Indian markets though the U.S. and European markets reacted adversely.

Prime Minister Narendra Modi earned a feather in his cap when he negotiated for an Indian to be the first president of the $100 billion BRICS Bank. It is expected that this would supplement government spending in the Indian infrastructure sector in the next two-three years.

The Reserve Bank of India announced a sop for infrastructure lending by exempting long-term bonds from reserve requirement, thus boosting sentiment among lenders and the infrastructure sector. IDFC was one of the best performers in this sector.

The finance minister gave more clarity on retro tax as well as the intent of a lower tax regime in the future.

The market rally, which started with hope and gathered momentum on announcement of intent by the new government, would now look for smooth execution to move to the next level. That would be the real test for the Bharatiya Janata Party government. The monsoon could still play spoilsport as just nine of the 39 meteorological sub-divisions have received normal monsoon rains . The delay in sowing could have an adverse impact on inflation. The trade deficit also touched a a 11-month high of $11.76 billion.

One would also need to keep a tab on escalation of geo-political issues,  especially in Gaza  and Ukraine. Any correction in the markets could force the “hot money” which chases momentum, to move out. As the whispers of a U.S. Fed rate hike get louder, liquidity could get scarce for the emerging markets. However, as of now, the markets continue ignoring these warnings, assuming that these will be swept away by the wave.

The results season started off well with both technology majors Infosys and TCS churning out better-than-expected results. Bajaj Auto disappointed with slower growth. Reliance Industries’ results were much better than most street estimates. But the stock may not see a huge upside due to the continued imbroglio over gas pricing and the government’s refusal to act in a hurry.

The coming week should see some heavyweights such as HDFC Bank, Axis Bank, ACC, Wipro and Punjab National Bank declaring results. The flood of offerings from PSU banks will keep pressure on this sector, especially with expectations of a 200 billion rupee issue from SBI. China’s manufacturing PMI data, to be announced on July 24, could affect the metals sector that has been in a bullish mode.

This week provided a good opportunity to lighten one’s position in high-beta stocks, which witnessed a good rally. Though the market is displaying a bullish fervour, it would be difficult for the Nifty to move beyond 7,800 based on the government’s policy announcements and intent.

The “sleeping giant” has woken up but it would be a while before it takes strides. This could unnerve short-term investors and momentum chasers, leading to a correction as they have been conditioned for high returns in the last few months‎.

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