India Markets Weekahead: Global risks could dominate

By Ambareesh Baliga-June 11, 2016

(Any opinions expressed here are those of the author and not of Thomson Reuters)

The Nifty did not cross the 8,300 level despite early momentum, as negative cues from global markets and a rebound in crude oil prices dented sentiment this week. The index oscillated in the 8,150 – 8,300 range to settle at the lower end of the band, down 0.6 percent.

Reserve Bank of India (RBI) Governor Raghuram Rajan attends a news conference after their bimonthly monetary policy review in Mumbai, India, June 7, 2016. REUTERS/Danish Siddiqui/Files

FIIs were net buyers to the tune of $451.23 million in equity. Crude oil prices rallied above $51 a barrel during the week and settled near $49 a barrel amid profit-taking. A sharp rebound in crude prices sparked concerns of its impact on India’s macroeconomic fundamentals with the country’s fiscal and current account deficit under threat if oil prices continue to rise.

The much-awaited Reserve Bank of India (RBI) policy was on expected lines. Rates were kept intact at 6.5 percent with the stance remaining accommodative. The RBI highlighted upside risks to inflation such as a pick-up in food inflation, sticky services inflation and a reversal in commodity prices. But the central bank maintained its inflation trajectory from the April policy at around 5 percent by the end of FY17. For this year, there seems to be scope for a 50 bps rate cut.

Prime Minister Narendra Modi concluded his three-day visit to the United States. His thrust this time has been on defence cooperation to expand India’s defence horizons. India’s imminent entry into the Missile Technology Control Regime has been the most important gain. Eyes are now firmly set on membership of the 48-member Nuclear Suppliers Group (NSG). Entry into the NSG will boost India’s arms exports and allow the United States to use India’s key military bases. Defence stocks such as Reliance Defence and Bharat Electronics rallied as a result.

In stock-specific action, IT major Infosys was the biggest index loser. The stock fell 6.76 percent after the

Prime Minister Narendra Modi acknowledges applause as he arrives to address a joint meeting of Congress in the House Chamber on Capitol Hill in Washington, U.S., June 8, 2016. REUTERS/Carlos Barria

management said overall demand remains volatile and it does not expect a recovery in spending from the energy sector before 2017.

State Bank of India rose 4.94 percent on reports the bank is considering a proposal to hive off its stressed-loan portfolio into a separate company, a ‘bad bank’. Transferring of NPAs to a separate company will help the bank concentrate on core banking services. Meanwhile, media reports also suggested that some sovereign wealth funds and private equity players have shown interest in acquiring a stake in the so-called bad bank proposed by SBI.

In the coming week, markets are initially expected to react to April IIP data which came in below expectations. It fell to -0.8 percent (vs 0.1 percent in March) as against expectations of 0.86 pct. Poor performance in manufacturing, mining as well as a decline in capital goods output led to lower industrial growth. Asian markets will react to China’s IIP data for May which will be out on Sunday. Progress of monsoon rains will be keenly watched.

Among key macro-economic announcements, the government is scheduled to unveil CPI data for May on Monday. It surged to 5.39 percent in April from a six-month low of 4.8 percent in March. WPI for May is scheduled to be released on Tuesday. For April, WPI inflation came in at 0.3 percent; it turned positive following 17 consecutive months of negative growth.

Among global macro events during the week, the Bank of Japan will unveil its monetary policy statement on Wednesday, while the Bank of England will decide on interest rates on Thursday.

The Federal Reserve headquarters in Washington September 16 2015. REUTERS/Kevin Lamarque/Files

Two important themes are expected to dominate global financial markets – the Federal Reserve meeting on Wednesday and the Brexit referendum the following week. Both events have wide-ranging repercussions for global financial markets as well as currencies. A June rate hike remains off the table given the risk from the UK’s EU referendum on June 23. Global market volatility in the next two weeks could be exceptionally high.

The Nifty is expected to stay within a range of 8,050 to 8,300 for the next week or so. Possible domestic and international triggers for the markets in the next few weeks include the monsoon, possibility of the Goods and Services Tax (GST) bill being passed in parliament’s monsoon session, Brexit, Fed action if contrary to market expectations of a status quo, and last but not least, the fate of RBI Governor Raghuram Rajan whose term ends in September.

Markets are expected to open gap down on Monday following dismal IIP data unless China IIP is a positive surprise. However, Nifty support at 8,050 should hold for the time being.