The landslide victory for Narendra Modi’s Bharatiya Janata Party (BJP) in the Uttar Pradesh and Uttarakhand elections will define the mood on Dalal Street when the Indian stock market opens on Tuesday after the long Holi weekend.
Although markets had been building up positions for a possible BJP win, they turned cautious in the last few days. But Saturday’s resounding victory confirmed that a Modi wave continues in India nearly three years after he came to power.
This gives the prime minister the mandate to go ahead with drastic reforms using unconventional methods such as his demonetisation move in November.
The Nifty had ended on Friday at 8,934 with gains of 0.4 percent for the week after trading in a narrow range. On the institutional investment front, FIIs have been positive lately. They turned net buyers in equity markets at $1,485 million in February. For the week, they bought to the tune of $1,299 million.
The IPOs of Avenue Supermarts and Music Broadcast Ltd recorded huge investor interest, with Avenue Supermarts getting subscribed 106 times the number of shares available.
The non-institutional non-retail category got subscribed a record 282 times. The subscription figures of these primary market issues suggest that investors have a huge appetite for quality issues priced well.
In stock-specific action, NBFCs specifically gold loan providers traded weak as the Reserve Bank of India said they cannot lend more than 25,000 rupees in cash against gold, as against the earlier limit of 100,000 rupees.
Dr. Reddy’s Labs declined 5 percent during the week after the U.S. FDA made 13 observations for the company’s formulations facility at Duvvada in Visakhapatnam.
Aviation stocks gained after the Delhi government cut value-added tax (VAT) on aviation turbine fuel (ATF) to 1 percent from 25 percent under the regional connectivity scheme, especially for the northeast.
On the macro front, IIP data for January came in better than expected, growing 2.7 percent vs -0.4 percent in December. All major subgroups such as mining, manufacturing and electricity sectors posted positive growth during the month.
However, a sharp fluctuation in IIP data, primarily because of volatility in the capital goods segment reduces its usefulness in policy formulation. The government is likely to announce a new series for the same, rebased to 2011-12 as against the 2004-05 series.
The markets will take notice of the crucial U.S. non-farm payroll data declared on Friday. Data for February came in substantially better at 235,000 jobs against an expectation of 190,000. This is an important precursor to the U.S. Federal Reserve meeting due on Wednesday.
The last time the Fed increased interest rates was in December. A recent wave of hawkish remarks from several key Fed members, including Fed Chair Janet Yellen, have helped boost expectations of an impending rate hike. The Fed Fund futures markets had continued to price in the likelihood of a March Fed rate hike above 90 percent.
Markets have discounted a rate hike this week, which could be the first in 2017. The focus is likely to be more on any hints or indications of a possibly accelerated pace of rate hikes going forward. The outlook had risen to three rate hikes in 2017 after the last hike in December.
Public sector OMCs will be in focus in the coming week as a regular fuel price review is due. Likewise, aviation companies will be watched as ATF prices will also be reviewed.
On the macro data front, CPI data is due on Monday, followed by WPI a day later. Retail inflation is seen at 3.65 percent versus 3.17 percent in January. There’s likely to be a month-on-month increase for the first time in half a year. WPI inflation is seen rising to 6.61 percent.
We should see a gap-up opening on Tuesday. The markets were fundamentally expensive at 8,900 Nifty levels and it will get further stretched with a gap-up. Those who had bought in the last few weeks on expectations of a positive elections outcome may also come forward to book profits.
We have seen in the past that the effect of such events does not last beyond four-five sessions - be it Brexit, U.S. presidential election and, closer home, the Bihar or Delhi election. General elections mean a paradigm shift and the effect lasts much longer.
We need to see how an emboldened Modi government moves forward with reforms that could be drastic as well as unconventional, and need not be beneficial from a stock market viewpoint in the short-to-medium term. I would advise utilising this euphoria to book 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.)