By Ambareesh Baliga
The Nifty rode on positive global cues to gain over 2 percent during the week to close at 8,262 despite the RBI disappointing investors by holding rates steady and a rather mixed message from the ECB.
U.S markets continued trade at record highs on expectations that the incoming Donald Trump administration will usher in tax cuts, deregulation and fiscal stimulus.
The rupee appreciated sharply against a basket of currencies after the RBI policy review. Despite a rise in the dollar index, the USD/INR pair broke the key support of 68 to settle near 67.5.
The RBI kept key interest rates steady due to an upside risk to inflation from an increase in commodity prices and withdrew the temporary 100 percent hike in the cash reserve ratio, which is likely to lead to a cut in bank lending rates.
The RBI believes that the impact of demonetisation would cause only short-term growth disruption, but cut the country’s growth estimate to 7.1 percent for FY17 from an earlier 7.6 percent.
The ECB left interest rates unchanged and surprised markets by saying its quantitative easing programme consisting of extensive bond purchases will be extended for a longer-than-expected nine months. Markets, however, took a positive cue from this.
Among the macro data announced during the week, IIP shrank an annual 1.9 percent in October despite being a festive month, worsening from a 0.7 percent rise in the previous month. This suggests an industrial recovery was elusive even before the government’s November decision to ban larger bank notes.
India's services sector activity declined sharply last month to 46.70 from 54.50 in October as cash shortage hit the sector. This would also get reflected in Q3 results which could be the worst for companies in many years.
SIAM has hinted that passenger vehicle OEMs are planning to cut down production cycles to manage inventories due to poor sales post demonetisation. We could have a nasty surprise with December sales data.
However, Maruti said it does not plan to take any production cuts given a waiting period of 6 months on its Baleno and Brezza cars. Hence there would be a clear distinction between models which have a waiting period and those which are off-the-shelf.
The coming week is an important one as the much-awaited Federal Reserve's monetary policy statement is due on Wednesday. Economic growth in the U.S. has picked up in the second half of the year, with Q3 GDP coming in at a 2.9 percent. The labour market has shown strength and inflation has picked up. The odds are now in favour of a rate hike in what would be the Fed’s first such move in a year and only its second in nearly a decade.
Investors will also keenly watch developments in the ongoing winter session of Parliament which ends on December 16.
On the demonetisation front, the pain still continues for citizens with never-ending queues at bank branches as well as at ATMs. Out of the nearly 15 trillion rupees in demonetised notes, about 12 trillion rupees have been deposited with banks till now. Does this mean people with black money have found a way to put most of their illegal cash back into the system? This is leading to the fear that the risk/reward of the cash crackdown may not favour the establishment.
The Nifty has moved beyond the 8,000-8,200 band but we could witness profit booking at higher levels as was witnessed on Friday. IIP data, which showed an unexpected contraction in October, will also cast its shadow when markets reopen on Monday. Utilise any upside to book partial profits.
(Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.)