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Indian markets turned green on Friday after falling for the previous seven sessions. The Nifty was still 1.9 percent down for the week at 7,985.
A lacklustre trend in global markets ahead of Christmas and the absence of major cues weighed on markets, as did the after-effects of demonetisation and the constant flip-flops in government announcements. Volumes remained dull and selling was prominent in mid -cap and small-cap indexes, which fell by 3.9 percent and 2.6 percent.
The rupee ended with modest gains against the dollar and other currencies as it recovered from 68-per-dollar levels.
With Budget 2017 a few weeks away, expectations on the sectoral and taxation front have been doing the rounds. Expectations are building up on the personal tax front with hopes of tax slabs being pushed higher and exemption limits set higher.
After the demonetisation “shock”, the government needs a two-pronged approach to kick-start the economy. The first would be to promote infrastructure and housing projects to ensure a pick-up in industrial demand and an increase in employment. They will have to trigger consumer demand, which can be done only by improving consumer sentiment - and lower taxation would be one of the triggers. Interest rates coming down, especially home loans and retail loans, will be a catalyst for asset acquisition.
During his trip to Mumbai on Saturday, Prime Minister Narendra Modi hinted at higher taxes in capital markets. It is not clear whether he was referring to resident individuals or hinting at foreign investors avoiding domestic taxes utilising international double taxation treaties.
Reintroducing the long-term capital gains tax along with current levels of securities transaction tax could dent market sentiment and tax collections.
On the global front, the Bank of Japan (BOJ) kept monetary policy steady while offering a brighter view of the economy. In her first speech since raising interest rates, U.S. Federal Reserve Chair Janet Yellen said the United States has the strongest jobs market in nearly a decade, and there are indications wage growth is picking up.
In the coming week, trading is expected to continue to remain dull in the holiday season. Globally, fund managers and investors refrain from taking big bets at this time of the year. One can expect normalcy back in January. However, this week is also derivative expiry week and volatility would also remain high on account of rollover of positions in the futures and options series.
The second day of the GST council meeting saw both sides agree to the compensation formula with the government agreeing to absorb any spillover of revenue losses under the new tax regime. The council will be meeting next on Jan. 3. The April 1 rollout deadline could be difficult to meet and the GST is most likely to be rolled out between April and September next year.
In stock-specific events, shares of oil marketing companies (OMCs) may see action on account of the month-end fuel price revision due next weekend. Petrol and diesel prices saw a steep hike recently. Also, airline stocks will be watched as a monthly price revision of aviation turbine fuel (ATF) is due. The upward revision due to higher crude prices could exert further pressure on margins.
Globally, equity markets are likely to trade volatile as Donald Trump’s trade policy takes shape. One needs to see how the rest of the world, especially China, would react as it unfolds. The U.S. initial jobless claims for the week ended Dec. 23 will be announced on Thursday and the data is expected to be benign.
Back home, the demonetisation drive comes to an end on Dec. 30 and Indians wait with bated breath for the next set of announcements from the government - with hopefully no further shocks, but some goodies to ease the common man’s pain.
The markets could see short covering in the settlement week and we could be back in the 8,000 - 8,200 zone for the Nifty. I would advise buying selectively as long as the range is not breached on the upside. However, one should be fully invested prior to Budget 2017, which is still about five weeks away.
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