Markets ended lower for the first time in seven months in September as FII inflows slackened due to tensions between India and Pakistan.
Concerns over the possibility that Donald Trump could be the next U.S. president and a $14 billion fine on Deutsche Bank over mis-selling of mortgage securities in the U.S. also weighed on sentiment.
The rupee suffered its worst fall since the Brexit vote in June after India announced "surgical strikes" on militants in Pakistan-ruled Kashmir, but the currency bounced back by the end of the week to close at 66.54 against the dollar.
India’s military action throws up worries of a further rise in tension between New Delhi and Islamabad, leading to a sharp knee-jerk reaction in markets on Thursday.
This fear was reflected in India’s share market Volatility Index (VIX) which shot up by more than 33 percent to 18.45.
Despite a comparatively steady Friday, the undercurrent was that of an “uneasy calm”.
In the energy sector, OPEC unexpectedly agreed on Wednesday to cut oil output in the first such deal since 2008, lifting oil prices. How much each member country will produce will to be decided at the group’s next formal meeting in November.
India on Friday cut the price of domestically produced natural gas on a gross-calorific-value basis to $2.50 mBtu for October-March from $3.06 mBtu in April-September.
The Asian Development Bank maintained its growth estimates for developing Asia for this year and the next at 5.7 percent, saying sustained expansion in China and India can steady the region, but warned of risks from a looming U.S. interest rate hike.
The projections for India were kept at 7.4 percent for this year and 7.8 percent for 2017, driven by strong consumption and an investment revival.
On the macro front, revised data suggest that the U.S. economy's performance was slightly better than expected as business investment wasn't nearly as weak as previously reported.
The GDP grew a 1.4 percent in the second quarter, while U.S. consumer confidence rose to 104.1 in September, its highest level since August 2007.
In the coming week, all eyes will be on the RBI’s monetary policy review, the first one after the formation of a six-member monetary policy committee. It will be interesting to see how the new panel functions, especially how the three external members will work with the central bank insiders.
The RBI is expected to maintain status quo for now and maintain a dovish stance.
Concern over escalating tensions between India and Pakistan are likely to persist and could keep investors on the sidelines, at least in the near term.
A government amnesty targeting tax evasion in India has prompted tens of thousands of suspected tax dodgers to disclose nearly $10 billion in undeclared income. This could be one of the positive triggers on Monday.
On the global front, Deutsche Bank said it would fight a $14 billion demand from the U.S. Department of Justice to settle claims it missold mortgage-backed securities.
Concern over the issue is likely to weigh on markets and the banking sector. Investors worldwide are worried that the problem may lead to a crisis in the global financial sector.
To make matters worse for the banking industry, U.S. banking giant Wells Fargo has recently been under investigation for a massive scandal involving dubious sales and business practices.
Investors will also focus on the remaining two U.S. presidential debates to be held on October 9 and 19.
Back home, Markit Economics will announce its India Manufacturing PMI data for September 2016 on Monday and India Services PMI data for September 2016 On Wednesday.
Considering all the above-mentioned factors, the Nifty may remain in a broad 8,550-8,800 range. A fall below 8,550 could take the index to 8,200-8,300 levels.
The recent dip is an opportunity and one could start deploying cash selectively as geopolitical uncertainties will weigh more than economic factors.
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.