The Indian stock market remained volatile during the week with the Nifty touching a high of 10,632 and a low of 10,462 to end with minor gains of 0.4 percent. The midcap and smallcap indexes underperformed the benchmark index. Sluggish tax collection estimates amid weak global cues dented risk appetite. The rupee ended at a three-month low of 65.17 against the dollar after U.S. Federal Reserve Chair Jerome Powell's first testimony.
Powell, addressing the U.S. Congress, signalled that the central bank could hike rates more than three times, should economic and inflation data continue to prove healthy. This caused the dollar index to move above its psychological level of 90 as Powell set the stage for the Federal Reserve to upgrade the U.S. economic outlook at the March meeting of the Federal Open Market Committee.
In India, lower tax collections could mean a higher fiscal deficit, but a few experts are predicting an upside surprise on GST collections in FY19 due to the e-way bill, which is expected to plug loopholes. However, we may need to wait to see this fructify.
The vehicle scrappage policy pending for some time has been approved by the finance ministry and sent to the GST Council for final approval, which will decide the amount of concessions central and state governments will offer fleet owners. The policy will be positive for commercial vehicle manufacturers with increased demand for new vehicles as 28 million vehicles may get scrapped. It will also have a rub-off effect on automobile component manufacturers.
On the macro front, India’s GDP grew at 7.2 percent in the December quarter as against a revised 6.5 percent in the previous quarter and was well ahead of market expectations. The manufacturing sector eased marginally in February, despite improvement in business conditions, on account of slower growth in new orders. Cost inflation accelerated to its fastest since last February. The Nikkei India Manufacturing PMI stood at 52.1 in February as against 52.4 in January.
On the stock-specific front, Punjab National Bank revealed a higher quantum involved in fraudulent transactions that widens the scope of more lenders being involved. Its shares slipped after the management said that the amount involved could be about 13 billion rupees more than the current estimate of 114 billion rupees.
The PNB case will set the path for improvement of internal processes and policies of public sector banks, which I think could be a silver lining in this mess created by the Nirav Modi fraud. In a booster of sorts for banks reeling under NPAs, a consortium of Dalmia Bharat and Piramal emerged the top bidders for Binani Cement with a 67 billion rupee offer that sees all banks getting their dues back.
February automobile sale numbers were mostly better than market expectations. Tata Motors reported a 38 percent rise in total sales, while Ashok Leyland had a strong 29 percent growth. Maruti Suzuki reported 15 percent growth as its sales rose for the thirteenth straight month, driven by demand for compact vehicles.
Fiscal deficit reached 113.7 percent of the revised target in the April-January period. It stood at 6.77 trillion rupees in the first ten months of FY18, as against the revised estimate of 5.95 trillion rupees. The fiscal deficit target was raised to 3.5 percent of GDP in Budget 2018, from 3.3 percent earlier. This is a worrying factor for markets.
In the coming week, India’s services sector PMI for February will be announced on Monday. Services PMI data from China, Japan and the United States is also expected on Monday.
The Bank of Japan’s monetary policy decision is scheduled on Friday. As widely expected, the BOJ left its key short-term interest rate unchanged at -0.1 percent at its January meeting.
Indian markets were shut on Friday for Holi, but continued global market correction could lead to a gap-down opening on Monday. However, markets will also take cues from assembly election results from the northeast.
Although certain macro data points have been showing signs of improvement, others are causing concern. The bank fraud and subsequent government action will result in caution on lending, and thus slower credit growth. Oil prices will continue to trouble on the fiscal as well as inflation side.
Developments on MSCI weightage rebalancing could trigger a move by index funds. More importantly, getting into election mode may increase volatility in the markets. We need to watch for psychological Nifty support levels of 10,200 where a breach could trigger a sell-off.
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.