India Markets Weekahead: Monetary policy to decide trend

September 27, 2015

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

Volatility marked the truncated trading week ahead of the derivative contract expiry, and a 3.5 percent drop for the Nifty early on followed by a spirited bounce-back midweek left a number of market participants confused. The index ended the week with a loss of 1.42 percent at 7,868.

A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, India, August 24, 2015. REUTERS/Danish SiddiquiSentiment turned cautious across the world after the U.S. Fed kept interest rates unchanged, which accentuated concerns about a slowdown in global growth. The emission scandal involving German car major Volkswagen AG deepened, taking a toll on the auto sector and threatening ‘Brand Germany’.

Institutional trading activity remained muted ahead of the Reserve Bank of India’s (RBI) policy meeting on September 29. FIIs sold shares to the tune of $317 million during the week. The rupee inched lower to close at 66.10 against the dollar after touching a low of 66.32. For the coming week, the pair is expected to trade range-bound.

Among Indian companies, Motherson Sumi Systems Ltd had to face the brunt of the crisis at Volkswagen as the latter is the company’s largest customer. Several mid-cap companies are in the midst of a financial crisis with high leverage levels forcing them to sell off their assets and look for operational restructuring. Some of the recent examples are Elder Pharma, Amtek Auto and Hotel Leela Ventures.

In the coming week, all eyes will be on the RBI’s fourth bi-monthly monetary policy review. It is widely believed that a rate cut is essential to spur India’s economy and corporate earnings. Though I have a different view on the ability of a rate cut to help the economy at this stage, it would be sentimental booster for the equity markets. The RBI governor’s stance and the outlook shared will be keenly watched given that the impact of a weak monsoon is not yet clear. The possibility of a Fed rate hike later this year will also have a bearing on the RBI statement.

Apart from this, the August fiscal deficit data and the Nikkei Markit Manufacturing PMI for September are expected during The Reserve Bank of India seal is pictured on a gate in Mumbaithe week. It is forecast to be 52.0 as against 52.3 in August. The automobile sector will be in focus as companies will be reporting their September sales numbers.

Globally, the euro zone’s unemployment data for the month of August is due on Wednesday and for China, the Caixin manufacturing and services PMI data for the month of September is due on Thursday. In the U.S., the influential non-farm payrolls data for the month of September is due on Friday.

Prime Minister Narendra Modi’s U.S. visit is evoking a good response among American corporate leaders. Modi met 47 of the Fortune 500 CEOs and invited them to “Make in India” by promising to create a good environment to do business.

Coincidentally, the Central Board of Direct Taxes (CBDT) announced that Minimum Alternate Tax (MAT) will not be levied on foreign portfolio investors, thus putting an end to the disputed tax issue.

The two important ingredients needed for the flood gates to open on foreign investment to India are:

(1) Ease of doing business (including an easy way to exit)

(2) A stable and predictable taxation policy.

The Federal Reserve headquarters in Washington September 16 2015. REUTERS/Kevin LamarqueThe actions in the past few months indicate that the government is working towards the same and Modi has also accepted that the “world will not wait” for India for too long.

I was cautious from the beginning of 2015 as market participants had turned over-exuberant about the government’s ability to deliver on its promises. However, I feel that the froth created post the 2014 elections has subsided to a large extent and reality has dawned on investors. I believe the government is sincere in its efforts but for a complex nation like India, it takes time to implement changes. As the window of opportunity gets narrower, authorities will now hopefully work with utmost urgency to implement reforms.

With the Nifty near the crucial support range of 7,750-7,800, the outcome of the RBI monetary policy review is an important factor in determining the market trend. I am expecting a 25 basis point rate cut, which is widely factored in by the markets. If there is no rate cut, then markets are expected to react negatively. On the other hand, a surprise 50 bps cut could push the Nifty above 8,000. Apart from this, September quarter corporate earnings will provide near-term triggers for the markets.

The Nifty is expected to trade in the 7,800-8,100 range in the coming weeks and a substantial decline from here on is not expected.

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