RBI keeps repo rate unchanged; all eyes on upcoming Q2FY18 earnings season..
benchmark Nifty gained 0.92 per cent on Friday, ahead of the outcome of the
Goods and Services Tax (GST) Council meet. This rally helped markets register
their first weekly gain in the past three weeks. The benchmarks gained 1.2 per
cent during the week. Previous week, they were down two per cent.
However, in our view caution should be exercised as situation could still be
precarious, as foreign portfolio investors (FPIs) are continuing to take money
off the table. FPIs have sold shares worth ~2,668 crore during the week. However,
the EM fund outflow picture changed marginally for markets such as Brazil that
saw an inflow of almost US$200 million. Fund flow in many Asian markets was
tepid as they were closed for holidays. South Korea, however, saw an outflow of
over US$480 million. While FIIs broadly remain cautious on EMs, the MSCI EM has
inched higher again to its three year high (up over 2%) and currently above
six-member Monetary Policy Committee (MPC) of Reserve Bank of India, headed by
Governor Urjit Patel, on Wednesday left the short-term lending rate, also known
as repo rate, unchanged at 6 per cent. The committee also did not tweak the
cash reserve ratio (CRR), which remained unchanged at 4 per cent, but cut
statutory liquidity ratio (SLR) requirement by 50 basis points to 19.5 per
cent. The projection of real GVA growth
for 2017-18 has been revised downward to 6.7 per cent from an August 2017
projection of 7.3 per cent, with risks evenly balanced.
domestic front, real gross value added (GVA) growth slowed significantly in Q1
of 2017-18, cushioned partly by extensive frontloading of expenditure by the
central government. GVA growth in agriculture and allied activities slackened
quarter-on-quarter in the usual first quarter moderation, partly reflecting deceleration
in the growth of livestock products, forestry and fisheries. Post the RBI
monetary policy outcome in which key interest rates were kept unchanged, the
index witnessed a round of profit booking.
factors that continue to impart upside risks to this baseline inflation
trajectory, RBI said. Advance estimates of kharif foodgrains production are
early setbacks that impart a downside to the outlook. The implementation of the
GST so far appears to have had an adverse impact, rendering prospects for the
manufacturing sector uncertain in the short term.
Friday’s gain was led by metal stocks. The benchmark BSE Sensex rose 0.7 per
cent and the National Stock Exchange’s Nifty 50 gained 0.9 per cent at the
close in Mumbai. All 19 sector gauges compiled by BSE advanced, paced by the
S&P BSE Metal Index’s 3.1 per cent rally. Tata Steel climbed 4.6 per cent
to its highest closing since January 2011, after posting a quarterly surge in
funds (MFs) garnered investor flows in excess of Rs 20,000 crore for the second
straight month in September, taking the year-to-date inflow tally beyond Rs 1
Last month, the equity schemes saw net inflows of Rs 22,233 crore, including Rs
2,404 crore pocketed by tax-saving MF schemes, according to data released by
the Association of Mutual Funds in India on Friday.
has reversed its depreciation momentum and is likely to remain in consolidation
in the range of 64.5-65.7. A move beyond 65.7 could again trigger some sell-off
in the debt segment (may be a key trigger for the weakness in equity segment as
well). However, a close tab should be kept on GoI 10 year yield, which is
shooting towards 6.8%. A move beyond this level could trigger weakness in the
rupee while equity and FII may sell equity and debt.
Q1FY18, Nifty companies reported high single-digit aggregate sales growth in
the June quarter, but margins have contracted sharply leading to a decline in
profitability. There has to be a dramatic improvement in the coming quarters if
the double-digit profit growth estimates for FY18 have to be achieved.
investment cycle also has shown no signs of upturn as evident from the fall in
capex to GDP ratio. While government spending has gathered pace in pockets like
roads, railways etc., private sector is not investing enough. With a million
Indians reaching the employment age every month, flagship projects like “Skill
India”, “Make in India” etc. need to start showing results. The only remaining
engine of growth, namely consumption, can only power the economy so much. The
services sector will not be able to create enough jobs, since tectonic shifts
are taking place in sectors like information technology, an important
contributor to India’s consumption engine so far.
has been good for markets as the Nifty moved aboved the psychological
10,000-mark despite sluggish economic growth in Q1FY18, driven by domestic
liquidity. Additionally, expectations from the GST Council meet to get
reduction in rates and faster refund gave thrust to small-cap and mid-cap
stocks to outperform. Global market remains positive due to better outlook on
the US employment data and tax reforms.
US Fed starting its balance sheet unwinding in the coming week, the reaction
from the market will be the key. Additionally, progress on tax reform coupled
with data like change in nonfarm payrolls, etc., will determine the direction
not only for US markets but also for global markets
We recommend investors to be stock
specific and consider companies with good earnings visibility at a decent