India Markets Weekahead: Mid-caps will be in action amid consolidation

September 20, 2015

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

A trader works underneath a television screen showing Federal Reserve Chair Janet Yellen announcing that the Federal Reserve will leave interest rates unchanged on the floor of the New York Stock Exchange in New York September 17, 2015.  REUTERS/Lucas Jackson  The U.S. Federal Reserve’s decision to hold rates came as a relief for Asian markets, especially in India where the Nifty ended the week at 7,982, or 2.5 percent higher. However, U.S. and European markets corrected sharply on Friday due to Fed chief Janet Yellen’s comments over China’s economic slowdown.

The rate decision also seemed to have taken into account sluggish U.S. inflation, which is still below the 2 percent target. The Fed would await a further confirmation of growth before embarking on a rate hike, probably before the end of 2015.

Back home, macro data including India’s index of industrial production, current account deficit and retail and wholesale inflation gave mixed signals on the RBI’s likely action regarding interest rates. But I am of the opinion that we should see a 25 bps rate cut, with the possibility of a surprise 50 bps cut. A status quo would be a huge disappointment and markets would react very negatively.

Monsoon concerns heightened with the IMD suggesting a rainfall deficit of 15 percent of the long-term average. This may not have a big impact on food inflation as India has sufficient stock of food grains and will resort to import of pulses where necessary. Fortunately, global food prices are benign due to excess production.  However, a deficient monsoon is expected to impact rural consumption, which may directly affect FMCG companies and sectors based on the rural economy.

Slowdown in rural demand for automobiles, especially two wheelers, may get offset by the increased cash flow-led demand due to OROP and the Seventh Pay Commission.

In another important development, the RBI awarded 10 permits to create small banks to lend to small businesses and farmers. These Small Finance Banks and Payments Banks are supposed to be the last-mile connectors between the mainstream financial sector and individuals at the grass-roots level.

Coming back to markets, the next important trigger after the Fed is the RBI monetary policy meet on September 29, followed by the Bihar election and the September-quarter earnings season. As mentioned earlier, a rate cut looks highly likely considering that the inflation trajectory has slipped below the central bank’s targeted levels for the second straight month.

The Bihar election has become extremely crucial as the ruling NDA government tries to up its tally in the upper house of parliament. A good performance by the BJP and its allies could boost market sentiments. The election will also be an acid test for Prime Minister Narendra Modi’s election team, which suffered a shocking setback in the Delhi election and a lower-than-expected result in Jammu and Kashmir. The next two states to go to the polls – Tamil Nadu and West Bengal – in 2016 will be even more difficult than Bihar for the BJP.

Global data points to look out for in the upcoming week include China’s manufacturing PMI and the euro zone’s Composite PMI for September 2015. In the U.S., flash manufacturing PMI index for September 2015, data on new home sales and the second quarter GDP data will be unveiled during the week.

With the Fed maintaining status quo on rates, a risk-on trade is expected to be re-initiated and the recent capital outflow from emerging markets could be arrested to some extent. India witnessed robust FII inflows to the tune of $461 million in the past week. The derivative contract expiry week could lead to volatility, especially due to short covering.A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, India, June 29, 2015. REUTERS/Danish Siddiqui/Files

The Nifty is hovering around the crucial 8,000 mark, which is also a psychological barrier. Any immediate move above 8,100 would take the index to an overbought zone. The trading range has shifted up from 7,500-7,800 to 7,800-8,100, with 7,750-7,800 band as a strong support level.

It seems the Nifty has made a near-term bottom at 7,545 levels, though it is too premature to suggest we are in the next leg of a rally. I expect a consolidation in this broad range before the next move, though we could see a lot of action in specific mid-cap stocks during this period. Domestic fundamentals will play an important role in driving any major upside from here on. One should be a passive buyer on dips whereas a sudden rise beyond 8,100 could be an opportunity to book profits.

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