India Markets Weekahead: Wait for a correction

August 28, 2016

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

Markets remained sideways in the absence of any major trigger and the Nifty ended the week lower by 1 percent at 8,592. The index failed to breach the 8,700-8,750 band yet again as caution prevailed ahead of a speech by Fed Chair Janet Yellen, who told a global monetary policy conference after Indian markets closed on Friday that the case for a rate increase in the U.S. had grown stronger.

The government’s choice of Urjit Patel the next RBI governor suggests there will be a continuity of the policies laid down by his predecessor. While tackling inflation and a clean-up of banks’ bad loans would continue to be the priority, one of the first tasks for the new governor would be to ensure that there is no disruption in redemption of FCNR (B) deposits which will start maturing in September.

Meanwhile, the weather department said cumulative rainfall has so far been 3 percent below the long period average (LPA). But this will not have a major effect on sentiment unless rainfall reduces drastically in the next few weeks as the benefits of a good monsoon have already been availed.

In company-specific news, Tata Motors’ June quarter numbers were better than expected due to improvement in JLR’s business. Welspun India was on the radar of investors and analysts after its second largest customer, Target Corp cancelled its contract after alleging that Welspun passed off cheap sheets as Egyptian cotton. The Indian textile manufacturer’s stock fell more than 50 percent during the week. Meanwhile, Mandhana Industries bounced back after signing a new agreement with Salman Khan’s foundation Being Human. GMR Infrastructure’s shares could see action in the coming week as the company won a contract to construct Goa’s second airport at Mopa on a BOOT (Build, Own, Operate, Transfer) basis.

The RBI made a spate of announcements related to the banking sector ahead of Governor Raghuram Rajan’s departure. The reforms based on the HR Khan Committee report will help increase participation and liquidity in the corporate debt market. The central bank also allowed banks to sell masala bonds, and issued stringent draft norms on large exposure of banks to standalone and group entities in its efforts to reduce corporate dependence on bank finance.

The week also saw the launch of a new payment system in India called Unified Payments Interface (UPI) that allows money transfer between any two bank accounts through a smartphone application without the need for bank account numbers.

Speaking at an annual economic symposium in Jackson Hole, Fed chief Janet Yellen signalled growing conviction that the central bank will raise short-term interest rates. She, however, indicated that rates will remain lower in the long run. Thus, a possible hawkish near-term rate outlook is offset with a more pleasant long-term outlook.A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai

In the coming week, global macro data to watch out for include U.S. ADP non-farm employment change data for August and pending home sales data in the U.S. for July, which will both be unveiled on Wednesday. U.S. non-farm payrolls data and U.S. unemployment rate data for August will be unveiled on Friday. These data sets are important for Fed rate decisions. China Manufacturing PMI data for August will be unveiled on Wednesday.

On Monday, markets are initially expected to react to the U.S. Fed chief’s speech. Later, stocks will take cues from India’s GDP data for April-June, due to be released on Wednesday. Markit Economics will announce its India Manufacturing PMI for August on Thursday. On the corporate front, DLF, MOIL and BPCL are the frontline companies which will announce their results in the coming week.

Stock markets are showing signs of exhaustion as there are no major domestic or international triggers ahead. The Nifty 8,550 is a good support level, below which we could witness nervous selling by traders who have been holding on till date on expectation of a ‘buy on decline’ sentiment. I expect a healthy correction to levels of Nifty 8,200-8,250, which should be a good re-entry point.

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