Indian markets fell after a six-week rally with sentiments affected over fears that a rise in oil prices may negatively affect India's terms-of-trade, weaken growth and add to pressure over meeting the fiscal deficit target.
Fears of a surge in inflation and corporate margins getting dented due to a rise in crude-based input costs also weighed on the markets.
Markets did not react even after the Goods and Services Tax (GST) Council reduced the number of items in the topmost tax bracket of 28 percent.
For the week, the Nifty ended at 10,321 down 1.25 percent with the Bank Nifty relatively outperforming and ending down 0.59 percent.
The rupee ended at a one-month low at 65.16 against the dollar on selling by banks amid oil importers’ demand and FII outflows from equities.
However, the dollar remained subdued against major peers due to a possible delay in the U.S. tax overhaul process till next year.
Oil prices hovered near two-year highs bolstered by geopolitical risks in the Middle East. Concerns grew on political instability in the Middle East as Saudi Arabia warned its citizens not to travel to Lebanon and urged the international community to impose fresh sanctions on Iran, another major oil producer.
Further, Saudi Arabia's crown prince cemented his power through an anti-corruption purge that included high profile arrests of royals, ministers and prominent investors.
Venezuela is on the brink of bankruptcy but seems to have got temporary relief with Russia agreeing to restructure the debt it owes to Moscow.
However, this could have repercussions on the global economy. Venezuela also owes ONGC about $540 million.
With the expected fallout of these geopolitical developments, there was a view that the Indian government may likely miss its FY18 fiscal deficit target of 3.2 percent of GDP due to shortfall in non-tax revenues and that rising crude oil prices will affect its fiscal deficit, inflation and current account dynamics.
It would be difficult for the government to reduce expenditure in order to keep the fiscal deficit on target as it will hurt India’s GDP growth, which fell to a four-year low of 5.7 percent in the first quarter of FY18.
In an effort to rationalise taxes, the GST Council decided to cut rates on 211 items across all tax slabs. With the pruning of items in the highest tax bracket to less than one-fourth, the government sees a revenue loss of 200 billion rupees ($3 billion).
The major beneficiaries of these rate changes are FMCG firms such as HUL, Jyothy Labs, Glaxo Consumer, Nestle, Emami and Gillette.
On the stock-specific front, Lupin received a warning letter from the U.S. FDA for its Goa and Indore plants that comprise 70 percent of its U.S. sales. The company has 150 abbreviated new drug applications (ANDAs) pending approval, of which 50 are from the affected sites. The stock reacted severely as it fell the most in six years.
Moody’s revised its rating of three PSU banks -- Bank of India, Union Bank of India and Oriental Bank of Commerce -- to 'stable' from 'negative' on the government's recapitalisation plan.
The revision in the outlooks reflects Moody’s view that the government’s capital infusion plan alleviates some of the downside risks to their baseline credit assessments and ratings.
It also revised Tata Steel’s rating outlook to ‘stable’ from ‘negative’ on expectations that the benign operating environment and recovery in the financial performance of its UK holding company will continue over a longer term.
Paper stocks were in demand during the week after media reports said the government initiated an anti-dumping probe against cheap paper imports from three nations.
Among companies declaring their earnings, HPCL, BHEL and Ashok Leyland were below estimates. While SBI, Tata Motors, Cipla, Bharat Forge, Amara Raja and Pidilite announced better-than-expected numbers.
On the global front, after the introduction of a new tax plan by the U.S. House of Representatives in the previous week, doubts were cast over the nature and timeline of tax reform which weighed on the dollar and equity markets.
This is because the Senate introduced its own tax bill that diverged considerably from the House plan. Senators argued for pushing major corporate tax cuts to 2019 instead of the House’s 2018 timeline.
For the coming week, some key corporates declaring their numbers include Coal India, L&T, Adani Ports, Gail, Sun Pharma, Eicher Motors and NTPC.
On the macro data front, Indian markets will look forward to CPI data which will be announced on Monday, followed by WPI data the next day.
Globally, China will release IIP data for October on Tuesday. Japan will announce third-quarter GDP data on Wednesday.
Markets are again showing signs of weakness. In addition to North Korea, there are now concerns over developments in Saudi Arabia.
The Gujarat election is not expected to be a cakewalk for the ruling Bharatiya Janata Party and the looming threat of higher crude prices, a weaker rupee and subsequent effect on the economy will continue to exert pressure despite liquidity flows. The Nifty 10,000 remains an important level to watch for in this correction.
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.