Just when markets were ready for their next upward move and the Nifty was positioning itself to touch the 11,000 level again, political uncertainty in Karnataka and a confluence of weak global cues punctured the rally. Fears that the RBI may hike rates in the near term due to a rise in core inflation also dented sentiments.
Crude oil prices rose above $80 per barrel, the U.S. 10-year yield crossed 3 percent, and the rupee plunged to a fresh 16-month low of 68 per dollar – all contributing to the fall of the Nifty, which ended the week lower by 1.9 percent at 10,596. Mid-cap and small-cap indices continued to underperform, falling 2.7 percent.
Despite the central bank’s intervention, the rupee has been witnessing continuous selling along with a rise in the dollar index. The currency is expected to trade in the 67.72-68.20 range in the near term. A breakout beyond this range should trigger the next leg of weakness.
Crude oil prices rose above $80 a barrel for the first time since 2014 as U.S. inventories fell and traders braced for the impact of renewed sanctions on OPEC member Iran. The commodity rallied this month after U.S. President Donald Trump’s decision to quit the international nuclear accord with Iran and reimpose sanctions, which will further strain already tightening global supplies. With India importing nearly 80 percent of its oil consumption, the price rise has worsened the country’s current account deficit.
On the stock-specific front, PSU banks were hammered after weak Q4 results from PNB and the RBI initiated a Prompt Corrective Action (PCA) on Dena Bank and Allahabad Bank due to poor capital adequacy ratio. Allahabad Bank hit an all-time low following the board’s decision to divest all executive powers of MD and CEO Usha Ananthasubramanian after her name was included in a CBI chargesheet related to the 140 billion-rupee Nirav Modi scam. However, news that that government is planning to inject fresh funds to shore up capital in some PSU banks helped control the damage.
On the results front, HUL, Bajaj Auto, Bajaj Finance, Tata Steel, JSW Steel, Lupin and Britannia reported better-than-expected numbers. Companies that disappointed include PNB, Hindalco, TVS Motors, Ashok Leyland and Voltas.
MSCI announced key changes to its MSCI India Index effective June 1, adding Avenue Supermarts, InterGlobe Aviation, Pidilite Industries and Power Grid while removing ACC, IDFC Bank, PFC, Tata Motors DVR and Vakrangee.
The India Meteorological Department announced that the southwest monsoon will likely hit Kerala’s coast by May 29, three days ahead of schedule. Last month, the weather department predicted normal rains this year.
On the macro front, CPI inflation rose for the first time in four months with an increase of 4.58 percent in April. April WPI stood at 3.18 percent compared to 2.47 percent for the previous month, and IIP moderated to a five-month low of 4.4 percent in March 2018.
In the coming week, key companies that will report their earnings include Colgate, Mahanagar Gas, Cipla, Dr Reddy’s Laboratories, IOC, SBI, Godrej Industries, Grasim Industries, Tata Motors, Gail (India), Glaxosmithkline Pharma, MOIL, Bank of Baroda, BEML, Cadila Healthcare, Engineers India, NBCC, Sun Pharma and Tech Mahindra.
On the global front, U.S. new home sales data for April will be announced on Wednesday and existing home sales data for April will be unveiled on Thursday. Also, the U.S. Fed will release minutes from its May policy meeting on Wednesday.
With the BJP dropping its bid to form a government in Karnataka on Saturday, markets are bound to have a knee-jerk reaction on Monday. However, I believe any fall will be mild as investors were already bracing for an upset. In addition to the political situation at home, global factors such crude oil prices, geo-politics and movement of global indices will keep Indian markets busy. Expect heightened volatility to continue for a while. However, investors’ nervousness will provide a good entry opportunity for those with liquidity.
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.