Indian markets remained sideways for much of the week even as the Reserve Bank of India (RBI) obliged with a 25 bps rate cut on Wednesday. Though the Sensex ended flat, the Nifty gained 0.5 percent to close at 10,066. The marginal rise in the benchmark indexes was on low volumes.
The rupee surged against the dollar to test a two-year peak after it breached the psychological 64-level mark to settle at 63.87 after the RBI rate cut.
Crude oil prices fell below $49 a barrel again after reports that OPEC's output rose last month despite efforts to slash production. OPEC and other producers including Russia have agreed to restrict output by 1.8 million bpd until the end of March 2018.
As was widely expected, the RBI cut the repo rates by 25 bps to 6 percent and maintained the neutral stance it adopted in February 2017. The central bank remained cautious on future inflation trajectory and maintained its FY18 real gross value added (GVA) growth and inflation forecasts. The monetary policy committee said they would be data dependent for the future course of action.
Oil refiners and marketers gained during the week with Indian Oil Corp the top performer (up 14 percent) followed by BPCL (up 10 percent). Reports of kerosene deregulation led to positive sentiments in the sector as the government asked oil marketers to increase prices every fortnight to gradually end the subsidy. Once completely deregulated, companies will not have to wait for subsidy payments.
Indian Oil Corp’s Q1 FY18 profit after tax (PAT) beat street estimates, growing by 22 percent while revenue rose by 5 percent. However, HPCL PAT halved on inventory losses and were below street expectations.
Automobile sale numbers in July surprised positively by posting strong double-digit growth. Two-wheeler sales grew by 12 percent year on year, while passenger vehicles sales were up sharply by 19 percent. The commercial vehicle segments witnessed 13 percent year-on-year growth.
Restocking at the dealers’ end after the Goods and Services Tax (GST) rollout coupled with improved demand due to price reductions led to double-digit growth in passenger vehicles. Most automobile companies such as Hero MotoCorp, Maruti Suzuki, Mahindra & Mahindra, Ashok Leyland and Tata Motors logged better-than-expected numbers.
Tyre stocks were in focus after the Directorate of Anti-Dumping & Allied Duties recommended the imposition of anti-dumping duty on truck/bus radial (TBR) tyres imported from China subject to finance ministry approval. On the other hand, results of Ceat were disastrous. The management blamed rising raw material prices and destocking ahead of GST.
On the macroeconomic front, the Nikkei India Manufacturing PMI contracted to 47.9 in July, down from 50.9 the previous month, the lowest since February 2009 and the first deterioration in business conditions in 2017 so far. Services PMI also plunged from June's eight-month high of 53.1 to 45.9 in July, its lowest level since September 2013. The Composite PMI Output Index fell sharply from 52.7 in June to 46.
The introduction of GST weighed heavily on the Indian manufacturing industry in July and business conditions in India's service economy deteriorated markedly. It needs to be seen whether this is transitory and whether normalcy will return soon.
The GST council met on Saturday and gave in-principle approval to the e-way bill. Although the approvals are expected to be electronic, there would be physical check posts similar to the abolished octroi posts, although fewer in number.
Core sector output rose 0.4 percent year on year and its cumulative growth during April to June, 2017-18 was 2.4 percent. Fiscal deficit reached 4.42 trillion rupees during Q1 FY18 or 80.8 percent of the budgeted target for FY18.
For the coming week, with most near-term triggers out of the way, the focus will shift back to the quarterly earnings season and the progress of monsoon rains. Key corporates scheduled to release Q1 numbers include Britannia, Tata Steel, Bank of India, Aurobindo Pharma, Eicher Motors, NMDC, and Tata Motors. On the macro front, IIP data for June is scheduled for release on Friday.
Most domestic macro numbers continue to disappoint. Geopolitical issues continue to hog headlines. Domestic liquidity flows turned into a flood with July reporting the second highest flows since 2008 of over 120 billion rupees due to lack of alternative asset classes. Other than a few index heavyweights, low-priced stocks are having a field day. With relentless liquidity-chasing momentum, we are in bubble territory.
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.