Markets were back on a selling spree after central banks across the globe hinted at reducing stimulus. U.S. markets were gripped by fears that upbeat wage growth in the United States may prompt the Federal Reserve to hike rates more aggressively in 2018. The Bank of England also warned of a sooner-than-expected rate hike.
Selling back home in India was further compounded by lingering concerns over rising inflation after the Reserve Bank of India’s monetary policy statement. The Nifty and Sensex ended the week lower by around 3 percent.
The rupee ended at an eight-week low of 64.39 per dollar on Friday compared with the previous week’s close of 64.05 per dollar. Brent crude oil prices dropped to $62 a barrel after touching a high of $71 a barrel in January.
Markets are increasingly worried about the withdrawal of monetary support from major central banks since this stimulus was the main reason behind the runaway rally in global markets.
Investors are worried that as global monetary policy gets tightened and quantitative easing is reduced or withdrawn, it may lead to a fall in bond prices and result in a rise in yields, which in turn reduces the attractiveness of equities as an asset class. U.S. bond yields have risen to a four-year high. Monetary conditions globally are tightening.
Back home, as expected, the RBI maintained status quo at its latest monetary policy meeting with the repo rate remaining at 6 percent with a hawkish undertone. The RBI is projecting CPI inflation to remain above the 4 percent target between now and March 2019, averaging around 5 percent in FY19.
The possible hardening of inflation due to fiscal slippages and a turn in the commodity cycle, which may result in a cost-push pressure on prices, had a bearing on the RBI’s decision to keep the rate constant. Going forward, the policy rate change is most likely to be an increase as rising commodity prices, rural wages and the proposed hike in minimum support price for agricultural produce will probably fuel inflation. Thus, I do not expect the RBI to maintain its neutral policy stance at the policy meet in April.
On the stock-specific front, the Supreme Court cancelled 88 iron ore mining leases in Goa, which is negative for Vedanta. The existing leases will run till March 15, after which mining activity has to stop. A special investigation team has been directed by the top court to determine the charges to be levied on the mining companies whose leases were renewed in 2015.
On minimum support price calculation, Finance Minister Arun Jaitley has clarified that expenses for seeds, fertilizer, hired labour, fuel and irrigation expenses will be taken into account. Food inflation is expected to inch up.
The sugar sector was in focus after reports that the government had doubled the import duty on sugar to 100 percent. The government is looking to cap the amount of sugar that mills can sell in the open market. This is to prevent sugar prices from falling sharply.
The State Bank of India reported abysmal results, with its first quarterly loss in 19 years. The losses were pegged at 24.16 billion rupees due to higher provisioning and losses in bonds as yields moved up. However, this phenomenon of cleaning up the books is a regular one in public sector banks whenever there is a change in leadership. This time it was accentuated by other factors resulting in a loss.
On the results front, markets cheered some good results such as Cipla, ACC, Tata Steel, SAIL and SpiceJet. Companies that missed estimates included ONGC, Punjab National Bank and Bank of Baroda. BPCL, Thermax and Siemens reported numbers in line with expectations.
On the macro front, India’s services activity remained in expansion mode in January, posting its fastest rise in almost three months driven by an increase in new business. PMI rose to 51.7 in January compared to 50.9 in December.
Companies announcing their results in the coming week include Bank of India, Britannia Industries, GAIL and Tata Power. Macro data points that will be out in the coming week are January CPI and December IIP on Monday, followed by WPI data on Wednesday.
Late on Friday, the stock exchanges under SEBI guidance decided to terminate an arrangement with overseas exchanges for providing data feeds. One needs to see whether this knee-jerk reaction by the exchanges will lead to improved flows to India or whether it will result in an overall reduction in volumes.
Markets have moved to a “sell on rally” mode. One should start nibbling only in those stocks where valuations have become attractive. The correction seems to have just begun and I believe we will get attractive levels for most stocks that are still considerably expensive.
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.