Markets corrected sharply in the last hour on Friday with the Nifty closing a tad below the crucial 9,200 mark. Sentiments were upbeat during the initial part of the week but investors turned cautious after the U.S. launched cruise missiles on an airbase in Syria. The rupee closed at a 20-month high of 64.28 on the back of unabated dollar inflows and weakness in the greenback. The Indian currency has gained 5.7 percent so far this year and seems likely to maintain its momentum due to rising foreign inflows.
The RBI’s monetary policy committee (MPC) unanimously decided to keep the repo rate unchanged at 6.25 percent, in line with market expectations. The central bank however decided to narrow the LAF corridor to 25 bps from 50 bps with immediate effect, implying a 25 bps rise in reverse repo rate at 6 percent. The RBI also allowed banks to invest in Real Estate Investment Trust and Infrastructure Investment Trust. This will give banks more investment options and will also have a favourable impact on the real estate and infrastructure sector.
The U.S. central bank’s FOMC policy minutes had a slightly hawkish tone as policymakers noted upside risks to the U.S. economy. FOMC members were in favour of taking steps to trim the country’s $4.5 trillion balance sheet.
Globally, geopolitical tensions intensified after the U.S. missile strikes in Syria in response to the deadly chemical attack that took place earlier in the week. The attack also puts a question mark on the future relationship between the U.S. and Russia, which backs the Syrian regime of Bashar al-Assad. Russia has warned of serious consequences to the missile strikes, so geopolitical developments over the next few days would be important.
Back home, automobile sales numbers show that the passenger car, two-wheeler and tractor industry all posted positive growth in 2017 while commercial vehicle volumes remained broadly flat. The Supreme Court’s decision to ban the sale of BS-III vehicles from April led to strong retail sales amid high discounts in the last few days of March. Thus, earnings for Q4 FY17 may show better topline but margins could drop. Secondly, a lot of latent demand would have been satiated due to which demand in April and May could be comparatively subdued.
Reliance Industries was the top gainer in the index pack, rising 11.5 percent during the week. However, it corrected after its telecom arm Jio had to withdraw its Summer Surprise offer (three months free service) after regulator TRAI said it did not fit into the "regulatory framework".
The Rajya Sabha on Thursday passed four key draft laws - Central GST Bill, Integrated GST Bill, Union territory GST Bill and the GST (Compensation to States) Bill – paving the way for the implementation of India’s biggest tax reform. The fact that they were passed without any changes reflects the political consensus on the reform. The GST Council will meet on May 17-18 to finalise rules and rates.
The coming week marks the beginning of Q4 results season with Infosys reporting its numbers on Thursday. Growth in domestic consumption companies is likely to be in single digits even if the impact of demonetisation is fading. On the sectoral front, earnings of consumer staples, discretionary, auto and export oriented companies are likely to remain subdued. More importantly, investors would be worried about the unabated appreciation of the rupee, which is bound to affect exporters, especially IT and pharma companies. Additionally, management commentaries of IT firms on client budget, implications of changes in U.S. visa regime and expectation of demand in the healthcare sector post Obamacare will be keenly watched. Banks are expected to report better profit growth on account of low base but NPA levels would be watched closely.
On the macro front, IIP data for February will be released on Wednesday. Industrial production improved 2.7 percent in January after recording a 0.1 percent decline in December 2016. CPI inflation data for March is also due on Wednesday. It increased to 3.65 percent in February. WPI for March will be out on Friday.
Markets continue to defy gravity, aided by upbeat sentiments and liquidity not supported by fundamentals. Levels are justified due to scarcity premium, liquidity, technical reasons as well as relative valuation. Normally, there is a gap between fundamentals and market valuation where either of them catches up with the other over a period of time. But when markets continuously ignore fundamentals and march ahead for a longer period of time, a bubble is formed. We are currently in that zone, thus I would continue to remain cautious.