Equities

Indian equities to take cues from rate move, Omicron spread

The course of the Indian stock markets this week will be determined by the nation’s central bank’s decision on interest rates and developments over the spread of the newfound coronavirus variant Omnicron.

The Reserve Bank of India’s monetary policy committee (MPC) meets this week to decide on benchmark interest rates on 8 December after the panel begins its 3-day meeting today.

The nation’s central bank has held benchmark interest rates at a record low level since February 2019. Since the virus outbreak in March 2020, the bank has also kept cash in the banking system in abundance to help accelerate the pace of economic growth.

Rate decision

“We expect volatility to remain high in the coming week as well as we have some of the important data and events are lined up,” said Ajit Mishra, vice president for research at Religare Securities. Adding that investors would be closely watching the MPC’s outcome, he said it would be tough for the committee “to balance things amid the risk of the new Covid variant and hawkish stance of the US Fed.”

At its last meeting in October, the central bank lowered its retail inflation projection pace for the current financial year to 5.3% from an earlier estimate of 5.7% and maintained its annual economic growth forecast of 9.5% for the year ending March 2022.

“We reiterate our cautious stance given the uncertainty surrounding the new variant. On the index front, Nifty may hover within the 16,700-17,600 zone. Among the sectors, the IT pack looks firm while others are showing a mixed trend. Traders should continue with hedged trades and maintain positions on both sides,” Mishra added.

Investors in India are also waiting to see the course India’s central bank takes after US Federal Reserve chair Jerome Powell last week said there was a possibility of bringing the cash infusing operation to an end than planned.

Cash in the system

Central banks across the world are tracking moves of the US, the world’s biggest economy, on ending abundant cash in the banking system to determine their respective monetary policy stance.

Some investors point that the combination of copious cash in the banking system and low-interest rates in India could spur inflation sooner than later.

India’s consumer price-based inflation accelerated in October but was still below the central bank’s target range. The print ended a three-month falling streak and rose 4.48% year on year in October.

“Stretched valuations, Fed’s observations on accelerating tapering and concern on inflation and the potential impact of the Omicron variant on economic activity and corporate earnings are the factors influencing FPI activity,” said VK Vijaykumar, chief investment strategist at Geojit Financial Services.

In early November many large foreign brokerages had downgraded India from overweight to neutral on stretched valuations, says Vijayakumar. Even after the recent correction, Nifty is trading at 20 times financial year 2022-23 earnings, which is much higher than the historical average of around 16, he adds. 

“So, foreign investors may continue to sell, though at a subdued pace. Since the risk appetite of retail investors and domestic investors continues to be high and foreign investors selling is easily getting absorbed, this need not result in a sharp correction in the market,” he added.

Buying opportunity

Some analysts recommend the recent drop in the indices is an opportunity to buy as the fundamental factors support a rise from current levels.

They point out the faster than anticipated growth of the Indian economy. A government report last week said the nation’s economy accelerated at 8.4% in the three months ended September from a year ago, marginally higher than the estimate of 8.3% in a capital.com survey.

Data provided by the stock market regulator showed that foreign institutional investors sold shares worth INR82.59bn, completing a seven-day selling streak.

“We expect Nifty to undergo higher base formation in the coming week in a broad range of 16800-17500 levels. Structurally, we remain optimistic, hence a decline from here on should not be construed as negative rather should be utilised as an incremental buying opportunity. Sectorally, the software, real estate, capital goods are expected to relatively outperform while BFSI, Auto provide favourable risk-reward setups,” said Dharmesh Shah, an analyst at ICICI Securities in Mumbai.

Read more: India’s economy expands 8.4% July-September, above estimate

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