India Markets Weekahead: Downside limited, get ready to nibble in

February 21, 2016

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

People watch a large screen displaying India's benchmark share index on the facade of the Bombay Stock Exchange (BSE) building in Mumbai, India, January 20, 2016. REUTERS/Shailesh Andrade

A spirited rally saw India’s main indexes gaining 3 percent for the week, their biggest weekly gain in 2016. The Nifty managed to close above the 7,200 mark despite stiff resistance even as the rupee hit 52-week lows against the dollar. FIIs continued to sell to the tune of $357.43 million.

The rally was led by global indexes on gains in crude oil prices after Saudi Arabia and Russia agreed to freeze oil output at January’s highs. Back home, Finance Minister Arun Jaitley said the government would announce a series of banking reforms. A report about the government’s plan to set up a ‘bad bank’ to take over NPAs resulted in a rally among PSU lenders.

On the global front, the People’s Bank of China said the central bank would keep the yuan stable against a basket of currencies while allowing greater volatility against the greenback. This allayed investor fears about the possibility of any further devaluation of the yuan. The minutes of the U.S. FOMC meeting that ended on January 27 indicated that rate hikes could take a pause in the near future.

The first-ever “Make In India” fair in Mumbai concluded on a high note with Maharashtra attracting investment pledges worth 8 trillion rupees across sectors. In addition, the state unveiled five new policies including the Maharashtra retail policy, single window policy and so on.

Ahead of the union budget, there is a trickle of positive announcements flowing in. The CCEA approved construction of six railway lines and a railway bridge worth over 107 billion rupees. Also, the long-awaited National Textile Policy is nearing finalisation and is likely to be issued before the end of April, 2016. The government is planning to reduce duty across all grades of iron ore to 10 percent. In order to boost the capital goods sector which has been growing at a meager 1 percent in the last three years, the government is planning to give a much-needed push to the sector and pull it out of stagnation. The government also approved eight highway projects worth 60 billion rupees. People stand outside before the inauguration at the exhibition centre of the 'Make In India' week in Mumbai, India, February 13, 2016. REUTERS/Danish Siddiqui

For the coming week, there are two key events lined up – the Railway Budget on Thursday and the Economic Survey report on Friday. Steel, cement, coal, and iron ore-related companies will be in focus as substantial movement for these commodities takes places through the railways and any changes in rail freight rates will be keenly watched. According to reports, the railway minister will unveil a plan to cut expenses and increase non-tariff revenue substantially.

With the presentation of the Union Budget just a week away, speculations about new proposals and measures have started doing the rounds. Some of them are – changes in the service tax regime and withdrawal of excise duty exemptions on some items to set the stage for the rollout of the nationwide Goods and Services Tax (GST). The government may raise the rate of service tax to 16-17 percent and also announce a final roadmap for rationalising corporate tax exemptions.

Markets are also expecting a renewed commitment to a fiscal consolidation roadmap and a fresh push to implement GST. However, any unrealistic increase in subsidies, higher-than-expected re-capitalisation of banks, farm loan waivers which are ideal recipes for increase in fiscal deficit, are all expected to upset markets. There are various media reports indicating re-imposition of long-term capital gains tax which looks highly unlikely, considering the current volatility in equity markets and the government’s talk of a stable tax regime.

In terms of reform expectations, the government’s self-declared target of keeping the deficit below 3.5 percent is what will limit it’s ability to announce big-ticket reforms. There are chances it might still let the deficit grow to accommodate reforms, but the move will not augur well for the government’s credibility, the RBI had pointed out. So it will be a wait-and-watch game for markets till budget day.

A broker reacts while trading at his computer terminal at a stock brokerage firm in MumbaiAmong key global data, Eurozone Markit PMI Composite index for February 2016 is scheduled for release on Monday, U.S. new home sales data for January 2016 will be out on Tuesday and U.S. Q4 GDP data is on Friday.

The Nifty closed above the crucial zone of 7,200 on Friday, and any break above this will set the stage for levels of 7,400-7,800 provided the budget isn’t a big disappointment. With major negatives already priced in and no big expectations from budget, the downside seems to be limited to the recent lows. If the index consolidates above 7,200-7,250 over the next 2-3 days, investors should start nibbling in.

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