India Markets Weekahead: Range-bound due to lack of triggers

August 13, 2016

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

A spirited rally on Friday ensured that the Nifty closed flat in a week marked by indecisiveness. With the Goods and Services Tax (GST) bill out of the way, market participants were left with no immediate near-term triggers. RBI Governor Raghuram Rajan’s last policy review had little impact on markets, as most had expected him to maintain status quo.

What did keep markets busy was stock-specific action like the Grasim-Aditya Birla Nuvo merger talks, dismal results from Idea Cellular and the mixed performance of public sector banks in the June quarter. FIIs were net buyers to the tune of $647 million during the week.

Grasim and Aditya Birla Nuvo were in focus after the decision to merge Aditya Birla Nuvo with Grasim. After the merger, Grasim would be a complex conglomerate with presence in a wide range of sectors like financial services, telecom, cement, textiles and chemicals.

Among companies announcing June-quarter results last week, Idea Cellular slumped 11 percent after reporting dismal numbers. But Hero MotoCorp’s highest ever quarterly sales volume and record operating margins lifted its net profit up 18.1 percent on year. With an above average monsoon so far and the implementation of the Seventh Pay Commission’s recommendations, the outlook remains cautiously optimistic for FY17.

State Bank of India results cheered the street and the stock gained as much as 10 percent. Other PSU banks’ performance was largely mixed. UCO Bank, Oriental Bank of Commerce and Bank of Baroda posted dismal numbers with non-performing assets rising while Bank of India’s asset quality declined only marginally on a sequential basis. Drugmaker Cipla is expected to trade weak after it posted a 44 percent decline in its April-June net profit of 3.65 billion rupees ($54.59 million).

Metal stocks have been in focus after India imposed anti-dumping duty on some cold-rolled steel products imported from China, Japan, South Korea and Ukraine. This week, the government imposed anti-dumping duty on some hot-rolled products imported from countries like China and South Korea for six months — in line with similar steps taken by the government over the last one year to protect domestic steel manufacturers. These measures act as short-term positive triggers but a long-term turnaround can happen only when the cycle turns.

The RBI policy review was on expected lines as rates were kept unchanged while maintaining an accommodative stance. The central bank maintained its CPI inflation target of 5 percent by March 2017, with an upside bias. The statement highlighted the key risks to the inflation trajectory from food prices and the impact of the Seventh Pay Commission. The implementation of GST could add to the uncertainty in the medium-term inflation outlook. For FY17, I expect another rate cut of 50 bps by the RBI. The October policy review will see the full impact of monsoon rains and the rate decision will be keenly watched.

On the macro front, IIP for June touched an eight-month high of 2.1 percent vs 4.2 percent a year ago and 1.2 percent in May, above market expectations. Increase in IIP was driven by strong growth in electricity, minerals, commercial vehicles and cement sectors. Capital goods contracted 16.5 percent in June, compared with a contraction of 12.3 percent a month ago. Consumer demand fared better, growing 2.8 percent in June as against 1 percent a month ago.

July CPI rose to a 23-month high of 6.07 percent vs 5.77 percent in June, marginally higher than expectations. It has fallen outside the 2-6 percent RBI watch range, putting at risk rate cut expectations in the near term. For the coming week, markets are expected to react to macro data announced after market hours on Friday.

Power Grid Corp is the only Nifty 50 constituent that will report its June-quarter earnings next week. Other key companies reporting numbers include Strides Shasun, Indian Overseas Bank, India Cements, and Sun TV Network.

On the macro front, the government will announce WPI data for July on Tuesday. In the United States, the housing starts report for July is scheduled for release on Tuesday. Data on IIP for July will also be out the same day. The FOMC will issue on Wednesday minutes of its last monetary policy meeting held on July 28 where it opted to keep interest rates unchanged.

The coming week could see range-bound movement with a negative bias due to lack of triggers. I would advise a strategy of profit-booking as the upside seems to be capped for now. A healthy correction will provide better entry opportunities over the next few weeks.

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