Right Time To Build Portfolio

In last couple of weeks, the domestic equity market was rising on expectation of rate cut by the reserve bank of India (RBI). This expectation was due to continuous decrease in inflation scenario during past few months. However, the RBI disappointed with only key policy rate cut of 25 basis points and no cut in cash reserve ratio. There was couple of reasons for the RBI governor’s such decision. First, the recent announcement by Federal Reserve Chair Janet Yellen on Friday (May 22, 2015) that U.S. central bank was poised to raise interest rates this year. Any rate cut by RBI Governor in current scenario may trigger a selloff in bond and equity market, which might again impact rupee and many other asset classes. The other reason that will be weighing in the mind of RBI Governor is below average monsoon rain that has the potential of pushing up inflation.

After the announcement of policy decision, the Indian markets posted its third-biggest fall of the year. The domestic market participants were hugely disappointed after RBI taking a cautious stance on the economic recovery. Further pain to market gets added on the same day due to concerns over Indian Metrological Department’s (IMD) lowering monsoon forecast for this year. Market took further jolt after services sector activity contracted for the first time in 13 months in May, largely due to decline in new order flows amid competitive pressure. Meanwhile, the seasonally-adjusted HSBC India Composite PMI Output Index – which maps both manufacturing and services sectors – fell to a 7-month low of 51.2 in May, from 52.5 in April. However, US index provider MSCI announced delay of Chinese A-share inclusion in MSCI index caused value buying in the Indian markets and gave support to the domestic market. 

The global market was showing a mixed trend over last couple of weeks. In USA, the economy shrank in Q1 owing to harsh weather conditions, the strength of the US dollar weighing on exports and a decline in non-residential fixed investment. In the Euro zone, financial conditions have eased due to the European Central Bank’s (ECB) quantitative easing and a depreciating euro. In Japan, growth surprised on the upside in Q1, supported by private demand as business spending boosted inventories and personal consumption. For most emerging market economies (EMEs), macroeconomic conditions remain challenging due to domestic fragilities, exacerbated by bouts of financial market turbulence. The recent firming up of crude prices has reduced headwinds to growth for some energy exporters, while increasing them for importers.

We expect market to be volatile over next few weeks with some positive biased due to value buying in some of the quality stocks. Hence, we advise our readers to capitalize this recent correction to pick quality stocks and build a strong portfolio.