REUTERS - Markets logged modest gains in a volatile and eventful trading week in which the Reserve Bank of India (RBI) raised rates for the first time in four years while maintaining a neutral stance.
On Wednesday, the RBI raised its policy rate by 25 bps going against market expectations. Another hike in the August policy review does not seem to be a possibility. Incoming data on growth and inflation will be critical in shaping the policy outcome. The RBI has cited various risks to inflation including an increase in crude oil prices and global financial instability.
Investors turned nervous as global markets remained weak due to emerging uncertainty in trade ahead of the G7 summit in Canada. The European Central Bank (ECB) preparing to taper its massive stimulus plan also dented investor sentiment. Risk appetite also waned after U.S. jobless claims pointed to a further tightening in labour market conditions, reinforcing expectations the U.S. Federal Reserve will raise benchmark rates next week and twice again later in the year.
Back home, the Nikkei India Services PMI declined for the first time in three months following weak demand. Sentiment was further dented by unabated selling pressure in mid-cap and small-cap companies due to reports of additional exchange surveillance. The Nifty ended the week up 0.67 percent to close at 10,768.
The rupee turned weaker despite the RBI rate hike as the focus shifted towards the Fed decision next Wednesday. A rate hike is already priced in at the current juncture and it should be interesting to see whether the rupee goes lower than 68.40 per dollar.
On the stock-specific front, pharma stocks were in focus after media reports that the government is proposing to bring all pharma products under a uniform pricing mechanism, whereby the annual price resets would be determined by a pharma pricing index.
Sun Pharma rose the most in six months after the U.S. Food and Drug Administration (FDI) issued a Voluntary Action Indicated (VAI) status to its Halol plant in Gujarat. This means Sun Pharma will now have to make voluntary changes to the plant if needed, but any adverse action by the regulator is unlikely.
Aurobindo Pharma’s Unit 4 injectables unit has also got VAI status from the FDA. Biocon was also in focus after getting FDA approval for the Biocon-Mylan biosimilar drug Fulphila. The sudden onset of positive news flow for the pharma sector may indicate that the worst may be over for the sector.
On expected lines, the Indian government unveiled an 80 billion rupee bailout package for the sugar industry to help cash-starved mills. The government has decided to build a 3 million tonne stockpile of sugar to soak up excess supply from the domestic market and also fixed a minimum support price to ensure retail prices do not fall further. Though a welcome move, industry players feel the bailout package is not enough.
Banking stocks will be in focus in the coming week after the finance minister announced that a bankers’ panel would look at the feasibility of setting up a new asset reconstruction company (ARC) or asset management company (AMC) to take over bad loans of public sector banks. The idea of taking stressed assets off the balance sheets of banks and parking them in a specialised entity has been discussed in various forms in the past, but it will just be a cosmetic change as the government will have to continue to provide support.
In the coming week, the government will announce IIP data for April on Tuesday with WPI inflation data for May expected on Thursday. On the global front, we have three major central bank meetings - Federal Reserve, European Central Bank and Bank of Japan - to look forward to. We also have UK and U.S. consumer inflation data and key employment figures from Australia along with Chinese and U.S. industrial production numbers.
The U.S. Fed rate outcome will be declared on Wednesday and is almost certain that interest rates will be hiked. However, it’s the European Central Bank meeting which is the more anticipated one, because of expectations that it may announce its intention to end quantitative easing at the end of the year after hawkish remarks on the euro zone economy this week. The meeting of U.S. President Trump with North Korea’s Kim Jong Un in Singapore on June 12 will be much awaited.
The market focus has turned back to trade tensions at the G7 meeting in Canada. Market participants are worried Trump’s hostile relationship with some of his G7 counterparts may lead to a full-blown trade war.
Mid-caps and small-caps seem to have bottomed out although this would be confirmed once we have consolidation for the next few days. However, 2018 will not provide a one-way movement like what we saw in 2017. Even as investors, we should look to trade to a certain extent to either book profits or reduce our cost of holding.
Politics seems to be taking a back seat as the Karnataka fiasco and losses in by-elections have been absorbed by the markets. Overall, I expect that the pain we saw in the recent past will be out of the way, although risks still remain.
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.