A week after India’s “surgical strikes” across the Line of Control, markets regained their composure with the Nifty ending the week higher by 1 percent at 8,697. Trading started on a buoyant note on Monday on positive global cues, but a 25 bps rate cut by the RBI on Tuesday did not have the desired effect on markets and investors sold into the previous day’s gains. The ongoing India-Pakistan tension and renewed possibility of a U.S. Fed rate hike also acted as dampeners. Mid-cap and small-cap stocks continued to outperform their larger peers during the week where FIIs were net buyers to the tune of $253 million.
Monthly automobile sales data for September showed a mixed trend. While the passenger vehicle segment showed strong double-digit growth led by festive demand and improvement in rural sales, the MHCV segment showed double-digit decline due to the high base of the previous corresponding month. LCV sales also showed double digit growth led by improvement in rural demand. The telecom sector remained in focus with the much awaited spectrum auction raising $9.9 billion for the government, well below the $84 billion worth of spectrum on offer. Energy stocks rose after the government cut the price of domestically produced natural gas to $2.50 per mBtu for October-March from $ 3.06 per mBtu in April-September on gross calorific value basis.
Meanwhile, the International Monetary Fund has raised India's growth forecast to 7.6 percent in 2016-17, up from its earlier projection of 7.4 percent, citing the resilience of its economy and robust growth momentum. The world economy will expand 3.1 percent this year. On the macro data front, Nikkei India Composite PMI Output Index fell from a 42-month high of 54.6 in August to 52.4 in September.
In the coming week, markets are initially expected to react to the U.S. monthly nonfarm payroll data for September, which was down from August. Hawkish comments by Fed officials and data indicating that U.S. unemployment benefit claims in the week ended October 1 fell to the lowest level in nearly four decades have strengthened the case for a rate hike by the U.S. central bank by the end of 2016.
With India’s Q2 corporate earnings season starting next week, investors are sitting on the sidelines for now as the results are key for markets, especially since other domestic triggers like GST and RBI policy review are out of the way. However GST rates are expected to be announced in the third week of October. The coming week is a truncated one as financial markets will be closed on Tuesday and Wednesday due to Dussehra and Muharram festivals.
Index major TCS will report its Q2 earnings on October 13 and Infosys the next day. Expectations are low from IT companies after their managements came out with profit warnings for the quarter due to challenges in BFSI verticals and client-specific issues weighing on growth.
Domestic macro economic data expected in the coming week include industrial production data for August (Monday), retail inflation for September (Thursday) and wholesale inflation for September (Friday).
We are in the midst of a virtuous cycle due to liquidity flows and valuations have become expensive. This type of situation usually leads to a bubble. The Nifty would continue to trade broadly in the 8,550-8,850 range. There seems to be more triggers for a fall than those for sustained gains. These include India-Pakistan tension, the U.S. presidential election, a possible Fed rate hike, earnings season and GST rates, to name a few. I still believe that we could see markets correcting sharply over the next few weeks. Tread with caution.
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.