The markets have been bustling this month, with the Nifty Index gaining nine per cent from its low on April 9. This gain in the Nifty has been mainly due to global cues, with both crude oil and gold declining nine per cent each during the month. Also, the earnings season so far has been good, with most companies beating estimates on margins and bottom line fronts. The key factors that will shape the market performance in the next few months would be Reserve Bank of India's (RBI) monetary stance, global cues, earnings season and government's progress on policy action.
Macro data from the Indian economy suggest the downturn has been arrested, although the timing and pace of recovery will depend on domestic macroeconomic policy and external environment. The government has started to act on fiscal consolidation, which is positive. However, the deterioration in the political situation has raised concerns about the ability of the government to continue with policy actions. Markets will be monitoring the political development, given the number of state assembly polls in 2013, followed by general elections in 2014. The current session of the Lok Sabha has started on a bad note, with no meaningful business conducted so far. So, another session may pass by without any legislation being passed.
Given that inflation has softened, growth has fallen and fiscal consolidation is on track, a gradual easing by RBI is likely, although concerns regarding elevated food inflation and a high current account deficit (CAD) will rule out aggressive easing. Importantly, because of tight liquidity, monetary transmission has been poor. Therefore, one would expect continued support from the central bank to improve liquidity conditions. Easing of interest rates will help demand recovery and reduce the cost of capital for businesses.
Fourth quarter FY13 numbers reinforce the fact that demand has weakened substantially in the economy. However, there's one silver lining: lower raw material costs (global commodity prices have softened and the rupee has stabilised), which is helping companies protect their bottom line growth. We expect the softer incoming economic data globally to continue. Autos and fast-moving consumer goods will be key beneficiaries of this trend. Pharma and private banks should also continue to post robust numbers. But political uncertainty could push back the reforms process and hurt business confidence. In such a scenario, it is unlikely the investment cycle will pick up anytime soon. This will keep industrials, metals and PSU banks' earnings under pressure.
Meanwhile, global cues will be shaped by the trend in incoming economic data from China and Western economies and movement in global commodity prices. Recent fall in global commodities improves India's terms of trade as it is a net importer of commodities. This will help narrow the CAD and fiscal deficit, reduce inflationary pressures and stabilise the INR. Also, it would aid corporate margins and help improve investor confidence. In CY13 year-to-date, investments by foreign institutional investors have reached Rs $11 bn. The concern, however, is that the economic data has started to soften, with global manufacturing PMI coming in much weaker than expected. This poses risk to the capital flows to emerging markets, including India.
Overall, in the near term we expect markets to trade in the 5,500-6,100 range. While easing inflation pressures, declining global commodity prices, reducing twin deficit concerns and gradual monetary easing will provide support to sentiment, rising political uncertainty and continued logjam in Parliament, along with softening economic data from the global economy, will cap the upside.
The author is head-research, wholesale capital market, Edelweiss Financial Services
