By Ambareesh Baliga
Markets turned indecisive during the week with the Nifty witnessing sharp gains in the first three sessions to cross 8,200 but then falling to close at 8,087 on Friday. The rise in crude oil prices after OPEC’s decision to cut production also dampened sentiments.
Gold prices also hit a near six-month low as asset class rotation following Donald Trump’s U.S. election victory led to the highest volatility in a decade. The rupee managed to post some gains after the Reserve Bank of India came out with a measure to absorb excess liquidity generated by the government’s ban on larger banknotes.
Sluggish automobile sales number for November wrapped up the week with a bearish bias. Brands which had a higher waiting period continued to show good numbers but are expected to suffer in the coming months.
The RBI hiked the CRR to 100 percent on incremental rise in bank deposits but said the move will be reviewed on December 9. It also temporarily increased the cap on the so-called Market Stabilisation Scheme to 6 trillion rupees ($87.9 billion) from 300 billion rupees for the year ending March 2017.
The RBI also capped banks' exposure to a single entity to 20 percent of a lender's capital base and to 25 percent limit to a group of connected entities. The earlier limits were 25 percent and 40 percent respectively. The move is aimed at containing concentration risk of banks.
NBFC stocks gained in the initial part of the week on expectation that the government will use the extra cash flowing into the system following demonetisation for new housing schemes and facilitate a lower interest rate structure. The measures, if implemented, could boost the housing finance sector as well as real estate players in the affordable housing segment.
Among the macro economic data announced during the week, the Nikkei India Manufacturing PMI stood at 52.3 in November, down from October's 22-month high of 54.4. India’s GDP rose 7.3 percent in Q2 after it expanded by 7.1 percent in Q1, but the data is irrelevant as demonetisation will change the trend in Q3.
The U.S. non-farm payroll reading for November was above consensus estimate. Unemployment rate fell substantially to 4.6 percent from 4.9 percent in the previous month, but wages have shown a decline in November for the first time since February. However, the probability of a Fed rate hike is still high.
On the immediate horizon is Sunday’s referendum in Italy on constitutional reform. After Brexit, all eyes are on the Italians and whether they will accept a package of constitutional reforms put forward by Prime Minister Matteo Renzi. The vote could have serious repercussions on European equity markets, the euro, and safe-haven assets like gold.
Apart from the Italian referendum and U.S. non-farm payrolls data, Indian markets will be influenced by the RBI’s action on MSS as well as its policy decision on December 7. There were hopes that the central bank will go for a big rate cut, but the move to raise CRR means that is not likely to happen.
Investors will also watch developments in the ongoing winter session of parliament, where proceedings have been mostly disrupted over the government’s demonetisation drive. Also, a GST council meeting ended on Saturday without the resolution of a deadlock on who would administer the tax.
In the coming week, stocks will remain volatile and also start building in expectations from the upcoming RBI and Fed rate decisions. The Nifty should continue to trade in the 8,000-8,200 range with temporary aberrations on either side. However, I do not rule out a panic bottom of 7,800. But that should be utilised as an opportunity to buy, especially for long-term investors.