Markets posted their worst week in 31 months, with the Nifty losing all the gains it had made in 2018 to end at 10,316. A confluence of factors including the RBI’s surprise decision to keep the repo rate unchanged, fears that the government will move away from deregulation of fuel, and the IL&FS fiasco led to an extended decline spanning five weeks.
On the sectoral front, the Nifty Energy index fell 15 percent during the week, while Nifty Auto and FMCG index were down 7 percent and 6 percent, respectively. Oil companies, both upstream and downstream, fell sharply and were down more than 20 percent. Oil marketing companies plunged by around 40 percent.
Losses in mid-cap (down 5 percent) and small-cap (down 4 percent) indices were not as severe as one would have expected, compared to the Nifty’s fall of 5.6 percent for the week. The rupee fell below 74 against the dollar but later settled near 73.70 levels after the central bank’s intervention.
The RBI on Friday surprised analysts by maintaining the repo rate at 6.5 percent as against expectations of a rate hike of 25 bps, and changed its stance from ‘accommodative’ to ‘calibrated tightening’, which confused investors.
Inflation projection has been revised downwards to below 5 percent in Q1 FY20, but I wonder how that would be achieved in view of the steep depreciation in the rupee.
The government had already given a jolt to the financial markets on Thursday by announcing a reduction in fuel prices by asking OMCs to absorb one rupee per litre of fuel. This did not go down well with investors, who read this as a reintroduction of government control on OMCs. Consequently, HPCL, BPCL and IOC stocks plunged.
Automobile sales data for September was a mixed bag. The floods in Kerala, increase in fuel prices and introduction of upfront multi-year insurance premium impacted consumer sentiment. The growth in the passenger vehicle segment dropped marginally by 2 percent whereas the two-wheeler segment grew in high single digits. Commercial vehicle sales grew the fastest, reporting a strong double-digit growth of 23 percent on strong cargo availability coupled with increasing freight rates.
IL&FS group stocks, namely IL&FS Engineering & Construction Ltd., IL&FS Transportation Network Ltd. and IL&FS Financial Services Ltd. were in focus following the government's decision to replace the flagship company’s management.
ICICI Bank was also in focus after its board accepted MD & CEO Chanda Kochhar's request to retire. This puts to rest all near-term uncertainties regarding her comeback in the midst of the ongoing enquiry into alleged conflict of interest. The change in leadership removes a key overhang around succession, but we could still see a few old skeletons tumbling out of the closet this quarter or the next.
On the macro front, India's manufacturing economy recorded an improvement in growth in September amid gains in new orders, output and employment. The Nikkei India Manufacturing PMI strengthened slightly to reach a level of 52.2, up from 51.7 in August. India's service sector continued to expand in September, but at a marginal rate amid reports of underwhelming market demand. The Service PMI was 50.9 during the month, down from 51.5 in August.
The coming week will see the onset of the corporate earnings season, with IT major TCS reporting its results on October 11. The performance of corporates will be closely watched as they could be one of the market saviours. For the September quarter, Nifty 50 companies are likely to report 11.4 percent growth in net profit, according to estimates.
On the macro front, IIP data for August and CPI Inflation data for September will be unveiled on October 12. Globally, investors will react to Friday’s monthly U.S. payrolls report, which was below estimates.
Back home, India agreed to buy S-400 surface to air missile systems from Russia in a deal worth $5.43 billion, which could attract sanctions from the United States. On Saturday, the Election Commission announced the election dates for Rajasthan, Madhya Pradesh, Chhattisgarh, Telangana and Mizoram, which will be held between November 12 and December 7, with counting on December 11. These elections will be an important test of Prime Minister Narendra Modi’s popularity ahead of his re-election bid in May 2019.
The velocity of the stock market’s fall has caught everyone by surprise. Investors should not exit their portfolio in panic or heavily deploy cash. Maintain the status quo till the storm settles and markets consolidate.
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.