India Markets Weekahead: Stocks to consolidate with limited downside

December 20, 2015

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

Markets staged a spirited recovery during the week with the Nifty ending at 7,762, up 2 percent and comfortably in the support band of 7,750-7,800.  Indexes were mainly influenced by the U.S Federal Reserve’s rate decision and the government’s mid-year economic review.

The Federal Reserve headquarters in Washington September 16 2015. REUTERS/Kevin Lamarque/Files

The Federal Reserve headquarters in Washington September 16 2015. REUTERS/Kevin Lamarque/Files

The Fed raised rates for the first time in 10 years by 25 basis points to end investors’ anxiety. The lift-off was seen as a sign of confidence in the strength of the world’s biggest economy, and it bolstered sentiments across world markets. However, Indian markets were spooked on Friday afternoon after the finance ministry’s mid-year review slashed the country’s full-year growth forecast to 7-7.5 percent for the fiscal year ending in March 2016, sharply lower than an 8.1-8.5 percent growth estimated in February. The government, however, reiterated that it would meet its fiscal deficit target of 3.9 percent and revenue deficit target of 2.8 percent for the current fiscal. This could mean further pressure on tax collections and a cut in expenditure.

There are concerns about private investments not picking up as entrepreneurs refuse to loosen their purse strings. I have been reiterating that unless the government spearheads spending on infrastructure, the private sector will not take the lead. We have seen a move in this direction in the past few months and I am hopeful that it should yield results by the last quarter of the financial year.

Earlier in the week, IIP numbers surged to a 60-month high of 9.8 percent year-on-year in October 2015. FIIs were net buyers to the tune of $83.32 million for the week. The rupee posted a smart recovery post the Fed decision and closed the week at 66.40 against the dollar. WPI remained in the negative zone in November 2015 at -1.99 percent while CPI rose to 5.41 percent. The acceleration in consumer price inflation was driven by an increase in food prices, especially vegetables and pulses.

Finance Minister Arun Jaitley said standard rates under the GST would be less than 18 percent, in a bid to address the Congress party’s concerns about the tax reform. Passing of the GST Bill, which has been stuck in the Rajya Sabha, would be sentimentally positive for the government. But even if the bill is passed, the actual implementation of the tax reform will not be possible before April 2017.

The RBI issued final guidelines on computing interest rates on advances of commercial banks based on the marginal cost of funds. This aims to improve the transmission of policy rates and improve transparency in determining interest rates on advances. I believe this would have a marginal impact on the spread and lower than anticipated.

The Supreme Court imposed a ban on registration of new private diesel vehicles in Delhi with an engine

Brokers trade at their computer terminals at a stock brokerage firm in Mumbai, August 25, 2015. REUTERS/Shailesh Andrade/Files

Brokers trade at their computer terminals at a stock brokerage firm in Mumbai, August 25, 2015. REUTERS/Shailesh Andrade/Files

capacity of over 2000cc until March 31, 2016 as part of efforts to reduce pollution in the capital. This is expected to have an immediate marginal impact on automakers present in this space. If the Delhi experiment is successful, it could be replicated in other major cities, which will be a major cause of worry for automakers. Manufacturers will have to invest more on developing and implementing fuel efficient power plants and technologies and diversify to alternate fuels.

IT companies also remained in the news. The U.S. House passed a $1.14 trillion spending bill to fund the government through next September. With the passage of this bill, Indian IT companies will have a $400 million visa bill, which is a big blow. Further, the Chennai rains impacted various companies operating in the region, resulting in some issuing an earnings warning.

For the coming week, we have a limited number of cues as markets have digested the much-hyped Fed event positively. Despite the downward revision in growth, India could continue to be among the better performing economies. It’s always the relative performance and not the absolute performance which draws investors’ attention. I believe that fresh FII allocation for 2016 will lead to positive flows to the Indian markets.

On the global front, data due in the coming week include U.S. Q3 GDP, U.S. new home sales data for the month of November 2015, U.S. initial jobless claims, China’s CB Leading Economic Index for the month of November 2015, and UK Q3 GDP data.

The Nifty is back in the 7,700-8,000 range, and we could see consolidation with lower volumes as participants would be in a vacation mood.

I am worried about the ongoing political slugfest, which is threatening to derail the economy. Indian corporates have shown resilience even during political crises, but today we are at a crossroad where we have the opportunity to provide a quantum leap for our economy in the years ahead. If we miss the bus, we could be relegated to low single-digit growth for years to come. I’m signing off with the hope that our political leaders are able see the big picture.

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