India Weekahead: Markets will look for global cues

June 5, 2016

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

A broker monitors share prices at a brokerage firm in Mumbai

Indian markets continued to consolidate and the Nifty ended the week 0.7 percent higher on the back of strong GDP growth numbers and above normal monsoon forecast. However, weak manufacturing and services data capped gains. Brent crude ended at $48 a barrel for the week while the rupee remained flat. FIIs were net buyers to the tune of $387 million.

Markets seem to have taken into account a best case scenario for the June-September monsoon season and any disappointment from here on could be sentimentally disastrous. Nevertheless, sectors dependent on rural demand would continue their momentum for now.

On the economy, GDP growth accelerated to 7.9 percent in the fourth quarter and 7.6 percent for the fiscal year 2015-16, higher than the 7.2 percent growth recorded in 2014-15. India also achieved its fiscal deficit target of 3.9 percent of GDP in 2015-16, and the government is aiming to further bring down it down to 3.5 percent in 2016-17.

India’s manufacturing sector expanded slightly as shown by the Nikkei India Manufacturing PMI, which edged higher to 50.7 in May from 50.5 in April, but the rate of growth in output was well below expectations and new export orders fell for the first time in 32 months. Meanwhile, India’s services sector growth eased last month as new business inflows expanded at the slowest rate since July 2015.

Automobile sales numbers for May were broadly in line with expectations with tractors showing some element of positive surprise prior to the onset of monsoons. For two wheelers and the passenger vehicle (PV) segment, new launches continued to drive demand for most players across segments. The M&HCV segment continued to report strong yearly growth, but the base effect is likely to catch up in the coming months. Scooters continued to drive growth in the two-wheeler space while motorcycle growth moderated.

The RBI has allowed NBFCs to refinance any existing infrastructure and other project loans by way of take-out financing without a pre-determined agreement with other lenders and fix a longer repayment period provided it does not exceed 85 percent of the initial economic life of the project or concession period in the case of PPP projects. This is positive for NBFCs in this space as well as infrastructure companies which are strapped for cash.

In the coming week, markets are initially expected to react to the influential monthly U.S. non-farm payroll data for May, which was well below market expectations. Based on this disappointing data, I expect the Fed to keep rates on hold in June, which should be positive for emerging markets.

Locally, the RBI policy decision on June 7 and the onset of monsoon will be the key drivers for markets in the coming week. The central bank is likely to keep key rates on hold. Among key macroeconomic announcements, the government is scheduled to unveil industrial production data for April on Friday. IIP growth had moderated to 0.1 percent in March after recording a 2 percent growth in February.

On the global front, the U.S. Fed chief will on Monday speak before the World Affairs Council of Philadelphia on economic conditions globally amid growing concerns of the possibility that Britain will withdraw from the European Union. Japan will unveil Q1 GDP data on Tuesday, while markets in Hong Kong and mainland China will be shut on Thursday.

The Nifty has managed to cross another psychologically important mark of 8,200 points, but the rally is showing signs of exhaustion as key triggers like a good monsoon have already been taken into account while the RBI’s policy meet could be a non-event with rates expected to remain unchanged. In such a scenario, markets will look for global cues, and we can hope to see the Nifty reaching 8,450-8,500 levels only once it’s confirmed that this year’s monsoon rains are normal, and that’s about three to four weeks away. Till then, we could see a range-bound movement for the index between 8,050 and 8,300 with political and economic news flows providing the necessary volatility.

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