Global cues, corporate profits to drive markets

Post RBI policy and GST roadmap clear, markets are will focus on growth in corporate earnings and global cues for direction

With the Reserve Bank of India (RBI) keeping key rates unchanged in the third bi-monthly monetary policy review for 2016-17, and the road ahead for the implementation of goods and services (GST) Bill clear now, the markets are likely to shift their focus to growth in corporate earnings (profits) and global cues.

Since the presentation of the Union Budget in February, the Nifty 50 index has surged nearly 23 per cent to reclaim 8,700 levels, aided by positive global and domestic factors. On Tuesday, the markets traded weak after the presentation of the RBI policy, with the S&P BSE Sensex and the Nifty 50 indices slipping around 0.5 per cent each to 28,000 and 8,670, respectively, in intra-day deals.

“The status quo on rates in the August policy was largely factored in. No one expected Raghuram Rajan to rock the boat in his last policy review as RBI governor. The policy stance was expected to remain accommodative given the way inflation has panned out. Having said that, the sole worry remains food inflation, which should remain in check given the good monsoon, which also has been the key trigger for the markets recently,” said Tirthankar Patnaik, India strategist at Japan-based Mizuho Bank.

The road ahead for the markets, analysts say, will mostly depend on an improvement in corporate earnings (profits) rather than a cut in key rates by RBI. That apart, global cues in terms of favourable commodity prices, especially oil, will also aid sentiment.

“From a flow perspective, things are likely to remain positive for the Indian markets until we see something turning around globally. Bond yields have been coming off in India, and that itself is making the bond market attractive. On the other hand, the rupee has been fairly stable. For foreign portfolio investors, there is money to be made in terms of pure differential in yields without suffering too much rupee risk. From that perspective, I expect the pace of flows to remain buoyant. The markets will also track corporate earnings. I expect the markets to gain between seven and 10 per cent from here on till March 2017,” Patnaik added.

Consumer price inflation for June 2016 came in at a 22-month high of 5.8 per cent, marginally higher than the 5.77 per cent in the previous month. Average inflation for the first three months of FY17 now stands at 5.7 per cent, up from 5.1 per cent in the first three months of FY16.

“We believe the new authority could cut the interest rate at least once this year. The scope for any substantial cut is limited as prices of metals, oil, resources, and even some crops have started rising significantly. But, good monsoon would ensure inflation remaining under control. The triggers for markets would be from possible improvement in corporate earnings rather than from the rate cuts going ahead,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.