India Markets Weekahead: RajanExit bigger jolt than Brexit

June 18, 2016

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

In a letter to staff, Raghuram Rajan has ruled out a second term, ending speculation over his continuing as RBI governor when his term ends in September. This is bound to shake market sentiment when it opens on Monday.

Reserve Bank of India (RBI) Governor Raghuram Rajan attends a news conference after their bimonthly monetary policy review in Mumbai, India, June 7, 2016. REUTERS/Danish Siddiqui

Reserve Bank of India (RBI) Governor Raghuram Rajan attends a news conference after their bimonthly monetary policy review in Mumbai, India, June 7, 2016. REUTERS/Danish Siddiqui

Indian markets were volatile throughout this week within a broad range. Worries over Britain’s exit from the European Union in next week’s referendum, dismal CPI and WPI inflation data back home and reports of weak initial monsoon rains dented sentiments.

The Nifty hovered around the 8,100 mark the entire week before closing nearly flat at 8,170. Crude oil prices bounced back on Friday after falling for six straight days to close near $48 a barrel. FIIs were net buyers to the tune of $44.36 million.

The week was dominated by headlines related to the UK referendum and central bank inaction as the U.S. Federal Reserve, Bank of Japan and Bank of England decided to keep rates unchanged. The dollar weakened against the yen mainly due to safe-haven buying in yen.

Back home, expectations of a sooner-than-expected implementation of the Goods and Services Tax (GST) helped indexes bounce back despite global chaos on Brexit fears. Despite near-term volatility, the bill is a long-term positive for various companies and will be a landmark reform in the Indian tax system.

Data showed India’s current account deficit narrowed in the last fiscal year. This is positive as a trade surplus is now within reach. However, Brexit risk and crude oil prices could weigh on the overall balance-of-payment surplus. On the inflation data front, WPI rose 0.79 percent in May, after rising 0.34 percent in April. It could be challenging to meet the RBI inflation target of 5 percent by March 2017 with risks emanating from monsoon uncertainty and implementation of the Seventh Pay Commission.

Shares of PSU banks were in the limelight after the RBI came out with a scheme for resolution of bad loans of

Illustration picture of postal ballot papers June 1, 2016 in London ahead of the June 23 BREXIT referendum when voters will decide whether Britain will remain in the European Union. REUTERS/Russell Boyce

Illustration picture of postal ballot papers June 1, 2016 in London ahead of the June 23 BREXIT referendum when voters will decide whether Britain will remain in the European Union. REUTERS/Russell Boyce

large projects. Automobile stocks were in focus after automakers approached the government to aggressively pursue FTAs with nations in Africa, Latin America and ASEAN region that do not have strong manufacturing base. Airline stocks were also watched after the Cabinet cleared the new civil aviation policy, which provides incentives to airlines for flying to smaller cities and towns.

The coming week will be action-packed as all eyes will be on the EU referendum on Brexit. Investors will also closely watch the progress of monsoon rains. Any disappointment on this front will take the markets lower. A lot of stocks thought to be benefiting from a good monsoon have seen a sharp rally in the past month. Some profit-taking is not ruled out considering the uncertainty regarding the monsoon.

Raghuram Rajan’s exit along with the Brexit referendum will keep Indian markets on edge. A break below 8,000 on the Nifty could be a short-lived one and would be an opportunity to buy.

The Brexit outcome may not have much of a shelf life for Indian markets and would be digested within a week or two. But all eyes would be on the next RBI governor’s appointment – that would be a litmus test for the Narendra Modi government. In light of these important developments, it’s advisable to stay on the sidelines of the market but utilise sharp cracks to invest afresh.

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