Bulls Relying On Macros To Inch Up The Slippery Slide
The cautiousness ahead of the much-awaited but expected RBI policy review is now over and the Indian stock market bulls seem to have taken charge yet again. The interest rate hike was expected and already discounted in the markets, whereupon the major indices initiated the relief rally. Both repo and reverse repo rates have been hiked by 25 bps. Inflationary pressures amid rising commodity prices, growing private consumption on the back of high rural demand, economy in Q4FY18 growing at its fastest pace in the last 7 quarters, favourable monsoon conditions, and the ramp-up in manufacturing activity has prompted the RBI to hike the rates. The concern over rising crude oil price persists and the government has indicated its willingness to transfer the burden to the people, either through taxes, high inflation or higher interest rates. The next possible option is to transfer the burden to industries that use fossil fuel in their production.
As for the RBI move, the decision may weigh on the markets which are already witnessing lower momentum. The rate hike will make loans expensive as it would increase the interest outgo of the borrowers, but encourage investors to save more. The FIIs are already off the Indian equity and debt markets with their YTD net investments hitting negative Rs 28,800 crore. Their withdrawal from the Indian markets has been triggered by the appreciating dollar and high commodity prices. Further, reduced exposure of MFs in mid-caps and small-caps too had led to some downfall. However, the month of June witnessed some buying activity from the FIIs with the DIIs maintaining their pace.
The June month kicked off with the release of auto sales numbers posting robust volume growth momentum in May. Barring the tractor growth which witnessed a relative slowdown, the 2-wheelers, 3-wheelers and commercial vehicles posted robust growth in May, with OEMs reporting double digit growth. The Auto index has bounced back from its crucial support level since the end of May. India's Manufacturing and Services activities posted a slowdown in May to 51.2 and 49.6, respectively. Nevertheless, the activities still appear to be in the revival mode, except for a slight easing in May amid higher cost burden, fuel price hike and rupee depreciation. Inflation and industrial production numbers are the next in line and would direct the markets in the near term. We will subsequently approach the Q1FY19 numbers, which would guide the markets. Despite higher toplines, many companies are expected to witness percentage de-growth in topline amid higher COGS.
The benchmark indices have beaten their provisional resistance zones, while the broader markets are off their lows. Yet, it would be too early to say that markets have bottomed out, as it may be just a short-covering rally. The geopolitical and domestic political tensions may pop-up any time, turning the market upside down. Markets may not see any drastic rise or fall in the near term and remain in the consolidation phase. Many sectors are awaiting clear breakouts along with banking and NBFC and look promising in the near term, except for pharma, realty and media to some extent.
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