India Markets Weekahead: Worst behind us, but bull run not quite here yet

October 10, 2015

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

The Nifty closed the week up nearly 3 percent at a seven-week high of  8,189, comfortably above the psychologically important support level of 8,000. The rally was supported by global markets that turned bullish on expectations of U.S. interest rates remaining low for longer than previously thought, amid weaker-than-expected U.S. economic data and a surprise rally by commodities. Closer home, sound bites from New Delhi seem to suggest the government wants to be seen as being proactive to mend the economy.

A worker cleans the stairs of RBI building in KolkataMarket sentiment remained upbeat during the week on account of various factors. A number of commercial banks announced a reduction in their base rate after a steeper-than-expected 50 basis points cut in the RBI repo rate. The base rate reduction will bring down interest costs on working capital loans in the coming months and augurs well for corporates.

U.S. Federal Reserve minutes were released during the week. Fed officials indicated that it is prudent to wait for clarity on outlook and most participants see lift-off conditions met this year. This boosted foreign inflows in emerging market economies, including India. As a result, the rupee traded strong and closed at 64.77 against the dollar. A statement by Prime Minister Narendra Modi on the rollout of the Goods and Services Tax next year further boosted confidence. German Chancellor Angela Merkel’s visit to India confirmed that India is an important trading partner, and kept spirits high.

Automaker Tata Motors gained nearly 20 percent this week after Jaguar Land Rover North America announced that U.S. sales rose 61 percent year-on-year to 6,850 units in September. Meanwhile, Maruti lost nearly 7 percent as the Renault Kwid launch heightened fears of competition in the entry-level segment. Although September auto sales numbers displayed muted growth, the festive season is three weeks late compared to last year and an inventory build-up will happen in October. I won’t be surprised to see stronger numbers then.

Power lenders were in focus this week on reports state governments may take over the debt of power distribution firms. The  Federal Reserve building in WashingtonPublic sector banks could be the beneficiaries if this is implemented. The RBI reduced risk weightage and rationalized loan-to-value (LTV) ratio for individual housing loans, which is positive for banks and housing finance companies as this will increase demand for low-cost housing. Fitch and the International Monetary Fund downgraded India’s GDP forecast, but the silver lining is that India stands out among global markets as an oasis of growth.

The coming week marks the official beginning of the September quarter earnings season, starting with Infosys on Monday. Infosys has been surprising markets for the past 2-3 quarters. The management is expected to maintain its FY16 revenue growth guidance. However, management commentary on the business environment would be interesting especially after HCL Technologies issued its second profit warning this quarter. Other companies expected to announce results next week include TCS, HUL and Reliance Industries. Indusind Bank reported better-than-expected results this week, but the stock corrected to close lower.

Corporate earnings growth is likely to remain sluggish in Q2FY16 as well. Slower economic recovery will have its bearing on the results. The oil and oil derivatives segment may continue showing better profits thanks to lower input costs. Although earnings expectations for FY16 have been toned down due to a below-normal monsoon and the global economic slowdown, quicker transmission of rate cuts, improved festive season demand and government spending would drive the earnings outlook going ahead. At 16x one-year forward earnings, the Nifty is trading at reasonable valuations and is near its 10-year average multiples.

A broker reacts while trading at his computer terminal at a stock brokerage firm in MumbaiAfter a long time, the primary market will witness some activity with the 11.5 billion rupee offering by Coffee Day Enterprises. The valuation of 67 billion rupees seems too high, considering it is a holding company and profits are still elusive for the main coffee business despite focused expansion for the last 15 years.

Key macroeconomic data to be announced this week include CPI and WPI for September and IIP data for August. Among global events, Greece faces a deadline on Oct. 13 to repay about $503 million in loans to the International Monetary Fund. The Federal Reserve will issue U.S. industrial production data for September.

The Nifty is trading near the crucial resistance of 8,200 and is still in the broad range of 7,800 – 8,200. If it trades above 8,200 levels for a few days, we could expect the markets to get into the next leg of the rally, and mark the beginning of a new bull run. I don’t expect that to happen quickly without convincing data at the ground level. Consolidation in this broad range should provide investors with trading opportunities.

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