Markets extended gains for the fifth consecutive week even as tepid global cues played spoilsport. In its policy review, the Reserve Bank of India raised repo rates by 25 bps as the fallout of rising inflationary pressure in the near future prompted the central bank to front-load its action.
The Nifty gained 0.7 percent to end at 11,361. Mid-cap and small-cap indexes outperformed with gains of 1.85 percent and 2.33 percent. On the sectoral front, the pharma index was up by 5 percent while the PSU Bank index shot up by 4.7 percent. FIIs were net sellers in four of five trading sessions with a net sell figure of 4 billion rupees. DIIs also were heavy sellers for the week, with a net sell figure of 10.6 billion rupees.
The rupee sustained above 68.50 levels against the dollar. For the coming week, the rupee is likely to weaken towards 69.50 as sanctions on Iran from Aug. 6 could increase the risk of a rise in Brent crude oil prices.
The U.S. Federal Reserve left its main interest rate unchanged at 1.75-2 percent. The upgrade to the central bank’s assessment of economic activity makes it more likely the Fed will raise interest rates next month. Back home, the RBI’s Monetary Policy Committee (MPC) raised the repo rate by 25 bps to 6.5 percent and maintained its neutral stance. The justification for a second consecutive tightening could lie in the fact that inflation has sustained above the 4 percent mark for eight months, and is likely to remain elevated. Key risks on the inflation front included volatile crude oil prices, monsoon rains, global financial market volatility and fiscal slippage.
July automobile sales numbers were a mixed bag. The two-wheeler and commercial vehicle segment showed double-digit growth while growth in passenger vehicles sales was flat after a record performance for the last few months. Monthly sales numbers from now on will reflect the actual trend in demand as recent monthly numbers had a base impact due to the ban on sales of BS III category vehicles.
Reliance Communications was in focus after the Supreme Court approved a settlement between the company and the Indian unit of Ericsson AB, paving the way for the sale of its assets to Mukesh Ambani’s Reliance Jio Infocomm Ltd. RCom shares rallied as much as 17 percent.
Jet Airways fell after reports that the company had informed its employees it can’t operate for more than 60 days without cutting expenses, including salaries. In a late night communication, Jet Airways denied these reports, but the damage was done. Jet Airways has said it has taken measures to reduce costs, which includes sales and distribution, payroll and maintenance.
On the earnings front, Titan, Pfizer, Exide Industries, Axis Bank, Gujarat Gas, Avenue Supermarts were some of the companies that reported better-than-estimated numbers. SAIL, Nestle, Marico, Power Grid, GSFC, Vedanta, UPL, Dabur, Escorts results were in line with expectations while ONGC, Godrej Properties, Pidilite, Tata Global Beverages, Tata Motors, Jubilant Life, Alembic, Idea Cellular and Interglobe Aviation results were below expectations.
On the monsoon front, even as private weather forecaster Skymet lowered its forecast for 2018 to ‘below normal’, the IMD said rain in August and September would be ‘normal’ at 95 percent of the long-period average. Crops are more dependent on the initial phase of monsoon than the latter half, thus it should not be a major cause of worry.
On the macro front, India's fiscal deficit reached 4.29 trillion rupees during the April-June period, or 68.7 percent of the budgeted target for the 2018-19 fiscal year compared with 80.8 percent a year ago. In spite of improvement, various fiscal concerns persist such as whether the budgeted targets for GST revenues, dividends and profits and disinvestment would be realised, and whether the outlays required for revised MSPs, the National Health Protection Scheme, fuel and other subsidies, and bank recapitalisation would prove to be adequate.
Growth in six infrastructure industries, with 26.7 percent weight in total factory output, was at 6.7 percent in June, the fastest in seven months and there are hopes industrial expansion may inch up in the coming months. Growth accelerated in June due to a sharp rise in cement, refinery products and steel output.
The Nikkei India Manufacturing PMI came in at 52.3 in July, down from 53.1 in June. Meanwhile, the Indian service sector remained in expansion territory for the second consecutive month.
After a significantly busy week, the coming week is relatively event-less one on the local and global front. Some key corporates declaring June quarter numbers are Adani Ports, M&M, BPCL, HPCL, Cipla, Lupin, Siemens, Aurobindo Pharma, Eicher Motors, GAIL, Hindalco and SBI.
Momentum has picked up in the mid-cap and small-cap segment and we are seeing fresh interest from investors, including retail. The highlight of the week was the correction in Nifty by over 100 points on Thursday, but the small-cap and mid-cap indexes were positive, a sign that the “tables” may have turned.
Indian markets should remain bullish in the near future after which election jitters could possibly lead to some correction. The strategy should be to ride this rally having borne the pain the last few months.
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.