In the past two days, the Government has moved forward with two key, market-sensitive, issues. First, it amended the India-Mauritius Double Taxation Avoidance Agreement (DTAA) and second, the Rajya Sabha passed the Insolvency and Bankruptcy Code 2016.
Compared to the Mauritius DTAA, the Bankruptcy Code is relatively new. Both measures are positives for the market. The short-term concerns on the DTAA apart, the issue has been hanging in the air for more than a decade. RBI, SEBI, and the Government have tried various measures to make foreign flows to India – including those via participatory notes (or P-notes) – more transparent.
The amendment to the DTAA is an important move in this direction. Compared to 2007, when the markets crashed following a ban on p-notes, the market’s reaction yesterday (gap-down opening, followed by a mild recovery) was far more measured. The passage of the Bankruptcy Code is a structural positive that the market has been waiting for quite some time. Admittedly, the impact of this measure will be seen only over the long term, but from the market’s perspective, it’s another tick mark on a to-do list.
Compared to the Mauritius DTAA, the Bankruptcy Code is relatively new. Both measures are positives for the market. The short-term concerns on the DTAA apart, the issue has been hanging in the air for more than a decade. RBI, SEBI, and the Government have tried various measures to make foreign flows to India – including those via participatory notes (or P-notes) – more transparent.
The amendment to the DTAA is an important move in this direction. Compared to 2007, when the markets crashed following a ban on p-notes, the market’s reaction yesterday (gap-down opening, followed by a mild recovery) was far more measured. The passage of the Bankruptcy Code is a structural positive that the market has been waiting for quite some time. Admittedly, the impact of this measure will be seen only over the long term, but from the market’s perspective, it’s another tick mark on a to-do list.
These tick marks matter to keep the bullishness in Indian equities alive. The Nifty rose more than 1000pts from its Budget 2016 lows to land just short of 8,000 in April 2016. This rally was merely part of a larger global rally across equities and commodities. Following one of the worst starts to a new year, there has been a risk-on rally across asset classes. Nymex crude is up a whopping 76% from its low hit earlier this year. After a long time, the Dow Jones Industrials crossed 18,000 in April. The Nifty’s 17% jump (from 6,826 in Feb to 7,992 in April) thus needs to be seen in this broader, global rally. Risk appetite in India remains high, going by the continued outperformance of the small/mid-cap indices versus the large-cap benchmarks. Over the past three months, the Nifty Midcap is up 22% versus 13% for the Nifty. Banks remain in focus – while the Bank Nifty has recovered its losses this year, the PSU Bank Nifty is still down 18% Year-To-Date. Clearly, woes surrounding PSU Banks haven’t vanished yet, even as private banks continue their outperformance. And finally, quarterly results of companies haven’t had any major negative surprise so far.
All this is known and discounted. What then of the future? Nothing much has changed on the Indian macro-scenario. The Budget’s fiscal consolidation measures and the RBI’s rate cut that followed are now behind the market. State election results aren’t that important considering that the BJP doesn’t have anything to lose or prove in these states. Investors have accepted that structural reforms, like GST, will take a lot of time. Expectations have been adjusted downwards to incremental reforms and state-level measures (such as land reforms in Rajasthan). Hence, there is no new trigger for the markets to anticipate. Domestic liquidity picked up in April, with net inflows into equity funds at their highest since November 2015.
This leaves the global scenario and that is always tough to call. Watch out for the US Dollar Index though. Its steady fall this year, coupled by – perhaps even leading to – the rise in commodity prices will remain in the limelight. As will rate hikes, as the economic scenarios in China (growth stalling or stabilizing) and USA (growth stalling or rising), will keep global markets on tenterhooks. We’re nearing the halfway mark for 2016. When we started the year, China seemed ready to collapse and the US Dollar set to rise in response. The reverse happened. Hence, the remainder of the year remains an imponderable. The one thing for sure, though, is that what happens globally, will follow locally in India.
Anupam Gupta is a Chartered Accountant and has worked in equity research since 2000, first as an analyst and now as a consultant. He contributes to the Business Standard platform, Punditry, through his blog, Beyond Markets on markets & the economic horizons.
He tweets as @b50
