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The market is likely to stay range-bound in the coming days as investors brace for monetary policy reviews by the Reserve Bank of India (RBI) on December 7 and the US Federal Reserve on December 13-14. Investors would keenly watch key developments in the euro zone – more precisely in Italy – besides movements in crude oil prices, rupee and FII flow trends.
With experts anticipating a delay in the revival of corporate earnings for another quarter or two, investors will keenly evaluate how the demonetisation move has impacted sectors and stocks. These will be seen in economic prints like the November auto sales numbers, and Nikkei India Manufacturing Purchasing Managers Index (PMI) due tomorrow.
“There will be a temporary setback to numbers on account of demonetisation, but I don’t expect a market crash in December. The headline indices will stay volatile in the range of plus/minus 3% from the current level,” said G Chokkhalingam, founder & managing director, Equinomics Research & Advisory.
Gaurang Shah, head investment strategist, Geojit BNP Paribas, believes the downside for Nifty50 looks protected at 7,950, while upside is capped at 8,250 by December-end.
Data show that foreign investors have pulled out Rs 16,724 crore from the domestic market so far this month (till Monday), in one of the worst monthly sell-offs since August last year. Shah says FII outflows might continue in December ahead of Christmas and New Year holidays.
That said, Shah doesn’t expect any large-scale outflow of funds from India, even if the US Federal Reserve raises its rate by 25 basis points at its policy meet on December 13-14.
Experts believe markets the world over have factored in at least a 25-basis-point rate hike by the US Fed. Fed Chair Janet Yellen had last raised interest rates in December 2015.
Back home, Nikkei Manufacturing PMI data for November are due on Thursday, while November auto sales data would be announced starting December 1.
Stocks like Maruti Suzuki, Hero MotoCorp, Mahindra & Mahindra, Bajaj Auto and Ashok Leyland will be on the watch list, as the Federation of Automobile Dealers Association (FADA) has estimated that vehicle bookings might have dropped 30-50% in urban areas and nearly 60% in rural areas in the wake of the government’s demonetisation move.
Banking stocks will stay in focus, especially after RBI’s decision on cash reserve ratio (CRR) denting the expectations of a cut in interest rates in December, as was widely expected following a deposit glut in banks after demonetisation. However, most expect a cut of at least 25 bps before March 2017.
“The expectation so far has been that RBI will lower the repo rate aggressively in the December policy, by 50 bps. This may be deferred till stability is achieved in the system. Depending on further RBI action or announcements in the period running up to the policy, our expectation on rates would be moulded,” said CARE Ratings in a research note.
To recall, in a surprise announcement last week, RBI had asked banks to maintain a cash reserve ratio (CRR) of 100% on incremental deposits collected between September 16 and November 11.
The central bank will review the measure on December 9. “If RBI feels that necessary adjustments need to be done, the upward revision in CRR could be rolled back to the normal level,” believes Gaurang Shah.
On the global front, Italy will have a referendum on December 4 on amending the Italian Constitution. A vote for yes will place more powers in the hands of prime minister. With polls currently pointing towards a narrow win for the 'No' camp, Prime Minister, Matteo Renzi may resign following the referendum causing uncertainty in the eurozone.
Chokkhalingam, however, believes the referendum will be a non-event for the Indian stock market, and only gullible people could react to it. “It is illogical to react to political developments which do not have substantial impact on economic fundamentals,” he says.
