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Indian markets extended a losing streak for the third consecutive week as traders remained wary of the Goods and Services Tax (GST) rollout on July 1. Volatility prevailed throughout on account of a futures-and-options (F&O) expiry that saw the highest turnover ever. The first monthly decline of 2017 saw the Nifty ending June with a drop of 1 percent.
The rupee retreated from recent highs tracking emerging market currencies as hawkish comments by global central bankers triggered a risk-off sentiment. GST-related uncertainties, a dovish Reserve Bank of India (RBI) policy stance and overvalued equities markets would lead to further weakness in the rupee towards 65 per dollar as overseas capital flows out.
Crude oil prices were up about 5 percent after data showed a drop in U.S. oil production, which reversed the bearish sentiment. Crude prices had hit a 10-month low the previous week. Worries of oversupply have led to a 16 percent drop in prices of Brent crude this year despite OPEC members and major producers promising to curb production.
U.S. President Donald Trump met Indian PM Narendra Modi in the United States. Both looked forward to creating jobs in their respective countries, growing the two economies, and expanding bilateral counter-terrorism and defence cooperation.
Globally, policy uncertainty gripped investor sentiment after U.S. Senate leaders were forced to delay a vote on a healthcare bill. Geopolitical tensions resurfaced on reports that China accused Indian troops of crossing the border in Sikkim.
In a long-awaited move, after four consecutive years of consultation, the MSCI added yuan-denominated “A-shares” of 222 large Chinese companies to its Emerging Markets index. India’s weightage is expected to see a reduction from 8.92 percent, and may result in a modest outflow.
In stock-specific moves, Central Depository Services Limited (CDSL) made a strong debut with a stock exchange listing at a premium of 67 percent and closed 75 percent higher. The IPO of AU Small Finance Bank got oversubscribed 50 times.
Shares of Interglobe Aviation dipped after it expressed interest in buying a stake in Air India. The acquisition will potentially add a lot of synergies for Indigo, which has a market share of 41 percent, but a huge debt of $8 billion on Air India’s books would worry investors.
Banking shares were in focus after the RBI’s directive to make higher provisions on 12 large loans being referred to the National Company Law Tribunal (NCLT). The Nifty Bank index fell 2 percent and the PSU Bank index declined 6 percent for the week. Increased provisioning is expected to hit the bottom line of these banks.
Meanwhile, JP Associates gained 33 percent after UltraTech announced it has completed the acquisition of JP Group’s cement plants for 162 billion rupees.
Macro-economic data in the coming week includes June Nikkei Markit Manufacturing PMI on Monday and Nikkei Services PMI on Wednesday. Globally, U.S. ADP nonfarm employment change data for June will be unveiled on Thursday and U.S. nonfarm payrolls data the next day.
Indian markets are expected to react to the rollout of India’s biggest tax reform in the coming week. It needs to be seen whether a number of small businesses start complying with the GST requirement, thereby increasing the tax pie for India or they shut down and increase unemployment. Will this rollout cause disruption in India’s economy? Only time will tell. Either way, it would be an eventful period with a lot of volatility and we should be prepared to utilise the moves.
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.