India Markets Weekahead: All eyes on RBI

September 25, 2016

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

A police officer stands guard in front of the RBI head office in Mumbai

The Nifty gained 0.6 percent during the week to end at 8,831, in line with strength in global indexes after risk appetite improved on the Fed’s policy decision. Mid-cap and small-cap indexes outperformed their larger peers, gaining 2 percent and 1.5 percent respectively, and FIIs were net buyers to the tune of $445 million. The rupee rose to close at 66.6 against the dollar.

 

The U.S. Federal Reserve kept rates unchanged as widely expected and its stance on monetary policy remains accommodative, thereby supporting further improvement in labour market conditions and a return to 2 percent inflation.

 
A rate hike is likely by the end of the year, but it will depend on economic data going forward. Furthermore, any future pace of tightening is likely to be even slower than previously expected and the Fed has projected a less aggressive path for hikes next year and in 2018. The Bank of Japan also kept rates unchanged.

 

Telecom stocks were in the limelight as top players readied their war chest for the upcoming spectrum auction in October in a bid to fight competition from Reliance Jio’s aggressive strategy.

 

Seven operators have together paid about 150 billion rupees to take part in the auction. The auction will comprise frequencies across seven bands, including the most lucrative 700 Mhz band. At the base price, the government hopes to rake in 5.56 trillion rupees over 20 years.

 

Shares in the real estate and infrastructure space attracted buying interest on reports that regulator SEBI has tweaked norms to make investments in real estate and infrastructure investment trusts easier. Hotels and hospitals have also been included under the ambit of these trusts.

 

Axis Bank was the top loser among banks, down almost 7 percent on reports that the SUUTI is likely to sell its stake in the bank at a sharp discount.

 

The much awaited monetary policy committee of the RBI is in place, which includes three external experts. The panel will conduct its first monetary policy review on October 4 and will be closely watched by investors on how it functions and whether it will cut rates.

 

The cabinet approved merger of the railway budget with the union budget, paving the way for early completion of the budget cycle and enabling better planning and execution of schemes from the beginning of the financial year.

 

In another important development, the GST council has adopted a draft timetable on the rollout of the tax reform and has finalised the draft rules on how the council will function.

 

The next meeting on September 30 will take up the issue of exemptions, while tax rates will be decided at the next meeting on October 17-19. The ambitious project would move India significantly up on the ‘ease of doing business’ chart, but implementation will not be very smooth.

 

On the macro front, India’s current account deficit (CAD) in the April-June quarter narrowed to $300 million or 0.1 percent of GDP, much narrower than the $6.1 billion in the same quarter a year ago. The contraction was mainly attributed to a lower trade deficit.

 

In the coming week, markets will remain volatile ahead of derivative contracts expiry on Thursday. Post that, we could see sideways trade until the RBI meets on October 4.

 

Expectations have been built in for a rate cut as the monetary policy panel is in place and inflation is closer to the RBI’s comfort levels. Rate-sensitive stocks like banking, auto and real estate could be in focus. However, I expect the central bank to hold rates till the U.S. Fed’s decision in December.

 

We are witnessing a traders market supported by liquidity, and investors would do well to hold cash for a while longer. Markets have been making lower tops, and news-based gap-up openings are being sold into. This indicates that a correction is on the horizon. The best-case scenario is of a consolidation.

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