Markets rose for the third straight week, supported by good Q3 earnings and on hopes of global reflation trade getting revitalised on U.S. President Donald Trump’s pro-growth comments. The Reserve Bank of India’s surprising decision to hold rates failed to pull down the bulls and the Nifty ended with marginal gains of 0.6 percent for the week to end slightly below the 8,800 mark.
FIIs continued to be buyers, pumping in $125 million during the week. The rupee gained significantly against a basket of currencies after the RBI’s policy review and closed the week at 66.87 against the dollar.
In a significant development, the Indian central bank shifted its policy stance to “neutral” from “accommodative”, allowing for flexibility in policy going ahead. It expressed concerns about achieving the medium-term inflation target of 4 percent.
Governor Urjit Patel also noted that there remains room for additional lowering of lending rates by banks as the RBI has cut rates by a total of 175 bps since the start of the easing cycle beginning January 2015, while the weighted average lending rate has come down by 85-90 bps. With focus on inflation, global political uncertainty and rising yields globally, the easing cycle theory is in jeopardy.
Global equities reacted positively after Trump said a “phenomenal” plan to overhaul business taxes in the U.S. may be released within the next “two or three weeks.” These comments were a saving grace to reflation trades that were weakening amidst limited details of the president’s promised pro-growth policies.
In stock specific news, Infosys hogged the limelight after the founders raised various corporate governance issues to the company’s board, including large severance pays given to key employees and a substantial increase in CEO Vishal Sikka’s salary. The board has hired a law firm to review corporate governance standards.
The ongoing earnings season cheered markets with some of the key companies reporting good numbers. Among the large caps, M&M, SBI, Power Grid, Lupin, Hero MotoCorp, Cipla, Tata Chemicals, NTPC, Titan, BHEL and Dr. Reddy’s reported better-than-expected results. Those who performed below expectations include Tata Power, Bosch, Aurobindo Pharma, SCI, Reliance Power and PNB. SAIL and Siemens were mixed, while Tata Steel’s results were in line with estimates.
The upcoming week will see the final batch of Q3 results from companies like Coal India, Idea, MGL, RCom, Britannia, GMR Infra, Hindalco, Nalco, NMDC, PFC, PTC, Sun Pharma, Tata Motors, Adani Enterprises, Adani Ports, REC, SpiceJet and Voltas.
Markets will initially react to Friday’s IIP figures for December, which contracted 0.4 percent. In November, IIP grew 5.7 percent largely due to base effect. Also, consumer durables output declined 10.3 percent in December, compared with a growth of 9.8 percent the previous month.
Apart from corporate results, there are no major triggers for markets and trading is expected to be dull with bouts of volatility as and when results of key companies are announced. PSU OMCs will be in focus as they announce their regular fuel price review. Aviation companies will also be watched as jet fuel prices are due for a review.
On the macro front, India’s CPI data for January will come out on Monday, while WPI is due on Tuesday. Globally, China’s CPI data for January will be released on Monday, while U.S. core CPI data is due on Wednesday and UK retail sales data for January will come out on Friday. Bailout talks for Greece, which are scheduled for February 20 during a meeting of euro zone finance ministers, may continue to remain inconclusive.
Elections are on in full swing with the crucial state of Uttar Pradesh holding the first phase of voting on Saturday, with six more to follow in the coming weeks. After the elections, monsoon forecasts will take centre stage by March or April. After a good monsoon in 2016, we may again face an El Nino effect this year.
What is heartening for stock markets is the continued liquidity inflows, with FIIs rejoining the bandwagon after a lull. However, too much liquidity can create a bubble.
It is time to be cautious again and I would advise continued profit-booking. It is painful being partially in cash when markets are moving up, but it’s better to be safe than sorry.