India’s markets post worst week in 31 months, wait for consolidation
INDIA’S markets posted their worst week in 31 months, with the Nifty losing all the gains it had made in 2018 to end at 10,316. A confluence of factors including the Reserve Bank of India’s (RBI) surprise decision to keep the repo rate unchanged, fears that the government will move away from deregulation of fuel, and the IL&FS fiasco led to an extended decline spanning five weeks.
On the sectoral front, the Nifty Energy index fell 15 per cent during the week, while Nifty Auto and FMCG index were down seven per cent and six per cent, respectively.
Oil companies, both upstream and downstream, fell sharply and were down more than 20 per cent. Oil marketing companies (OMCs) plunged by around 40 per cent.
Losses in mid-cap (down five per cent) and small-cap (down four per cent) indices were not as severe as one would have expected, compared to the Nifty’s fall of 5.6 per cent for the week.
The rupee fell below 74 against the dollar but later settled near 73.70 levels after the central bank’s intervention.
The RBI on Friday surprised analysts by maintaining the repo rate at 6.5 per cent as against expectations of a rate hike of 25 bps, and changed its stance from ‘accommodative’ to ‘calibrated tightening’, which confused investors.
Inflation projection has been revised downwards to below five per cent in the first quarter of financial year 2020 (1QFY20), but I wonder how that would be achieved in view of the steep depreciation in the rupee.
The government had already given a jolt to the financial markets on Thursday by announcing a reduction in fuel prices by asking OMCs to absorb one rupee per litre of fuel.
This did not go down well with investors, who read this as a reintroduction of government control on OMCs. Consequently, HPCL, BPCL and IOC stocks plunged.
Automobile sales data for September was a mixed bag.
The floods in Kerala, increase in fuel prices and introduction of upfront multi-year insurance premium impacted consumer sentiment.
The growth in the passenger vehicle segment dropped marginally by two per cent whereas the two-wheeler segment grew in high single digits.
Commercial vehicle sales grew the fastest, reporting a strong double-digit growth of 23 per cent on strong cargo availability coupled with increasing freight rates.
IL&FS group stocks, namely IL&FS Engineering & Construction Ltd, IL&FS Transportation Network Ltd and IL&FS Financial Services Ltd were in focus following the government’s decision to replace the flagship company’s management.
ICICI Bank was also in focus after its board accepted managing director (MD) and chief executive officer (CEO) Chanda Kochhar’s request to retire.
This puts to rest all near-term uncertainties regarding her comeback in the midst of the ongoing enquiry into alleged conflict of interest.
The change in leadership removes a key overhang around succession, but we could still see a few old skeletons tumbling out of the closet this quarter or the next.
On the macro front, India’s manufacturing economy recorded an improvement in growth in September amid gains in new orders, output and employment.
The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) strengthened slightly to reach a level of 52.2, up from 51.7 in August.
India’s service sector continued to expand in September, but at a marginal rate amid reports of underwhelming market demand. The Service PMI was 50.9 during the month, down from 51.5 in August.
The coming week will see the onset of the corporate earnings season, with IT major TCS reporting its results on October 11.
The performance of corporates will be closely watched as they could be one of the market saviours.
For the September quarter, Nifty 50 companies are likely to report 11.4 per cent growth in net profit, according to estimates.
On the macro front, IIP data for August and CPI Inflation data for September will be unveiled on October 12.
Globally, investors will react to Friday’s monthly US payrolls report, which was below estimates.
Back home, India agreed to buy S-400 surface to air missile systems from Russia in a deal worth US$5.43 billion, which could attract sanctions from the US. On Saturday, the Election Commission announced the election dates for Rajasthan, Madhya Pradesh, Chhattisgarh, Telangana and Mizoram, which will be held between November 12 and December 7, with counting on December 11.
These elections will be an important test of Prime Minister Narendra Modi’s popularity ahead of his re-election bid in May 2019.
The velocity of the stock market’s fall has caught everyone by surprise. Investors should not exit their portfolio in panic or heavily deploy cash.
Maintain the status quo till the storm settles and markets consolidate.
The views expressed in this article are by Ambareesh Baliga, an expert in India’s stock market, not those of Reuters News.