On a Smooth Road with Sharp Turns
“There are decades where nothing happens, and there are weeks where decades happen,” This famous quote by Russian politician Vladimir Lenin holds true for the Indian markets as over the last couple of weeks we have seen it all. The sharp pullback in the markets caused by a bond yield scare along with the fear of the onset of a second wave of the corona virus in India which led to a sharp spike in India VIX was soon followed by a glitch faced by India’s largest stock exchange, the National Stock Exchange (NSE), on Wednesday as a result of which trading was halted for almost four hours.
And now, at last a massive recovery has been witnessed by the markets with Nifty gaining almost 2.65 per cent in the last two trading sessions and Bank Nifty soaring about 4.10 per cent. Interestingly, the markets have bounced back sharply despite selling pressure witnessed by the FIIs that have been net sellers to the tune of Rs 893.25 crore and Rs 1,569.04 crore on Monday and Tuesday. Wednesday’s figures showed a massive inflow of Rs 28.739.17 crore but this includes a Bosch deal of Rs 30,000 crore. And so if we adjust this amount, the figures would be net negative.
In the recent scenario, the sharp fall and even sharper recovery of the markets is nothing new for market participants, but the NSE suffering a four-hour outage leaving traders wondering what would happen next was the biggest event and we thought that it would take centre-stage and dominate all conversation. But though it did get its share of attention, the announcement made by Finance Minister Nirmala Sitharaman that the centre has lifted its embargo on grant of government businesses to private banks hogged the limelight as this acted as a key catalyst for a massive surge in Bank Nifty on Wednesday.
All private sector banks now will be allowed to participate in government-related business such as collection of taxes, pension payments and small saving schemes. This move will spur further competition and promoter greater efficiency in the standards of customer services, the government’s Department of Financial Services said in a statement. Further, the Union Cabinet approved the production linked incentive (PLI) scheme for the pharmaceuticals and IT hardware sectors, entailing an outlay of Rs 15,000 crore and Rs 7,350 crore, respectively.
The PLI scheme for pharmaceuticals, whose duration will be for nine years from FY21-29, aims to create employment opportunities and is expected to promote the production of high-value products in the country and increase value-addition in export. Further, the PLI scheme for IT hardware such as laptops, tablets, all-in-one PCs and servers is a vital segment to promote manufacturing under the mission of self-reliance as there is huge import dependence for these items at present. With all these announcements the government’s intentions are clear: reforms are crucial to lay the path for India to become one of the top economies in the world.
In the West, the Dow Jones closed at record high levels and was just shy of the 32,000 milestone after the Federal Reserve’s chairman echoed the central bank’s commitment to stick with accommodative polices and was generally dismissive of any inflation concerns. With this, the risk-on mode is back; however, one risk factor to keep in the background, which could come to haunt markets sooner or later, would be the risk of surge in commodity prices. In fact, commodity price surge is emerging as a risk now for India’s stock market. BofA Securities said in their report that “our bottom-up analysis suggests 31 corporates, comprising 46 per cent of the free-float weighted market cap within Nifty, are exposed to commodity risk.”
With steel, cement, crude, coal, copper, aluminium and iron ore being the key commodities relevant for Nifty companies and the prices of these commodities shooting up by up to 75 per cent since June, the result may be margin pressure. If the prices of commodities continue to ascend, this will pose a big threat to automobile manufacturers and rising fuel prices may add to their misery as it may delay consumers’ decision of purchasing automobiles. Hence, investment in automobiles stocks should be done only after due diligence. The level of 14,650-14,700 on Nifty is a good base and as long as Nifty trades above this zone – be it with a bullish bias and on the upside – closing above the 15,200 level could open the gates for a fresh all-time high.
