Markets registered sharp losses during the week as geopolitical worries continued along with persistent selling by FIIs. Weakness in the rupee also dampened sentiment.
Comments from the U.S. Federal Reserve that it is 'wary' of raising rates 'too gradually' affirmed the market belief that there would be one more rate hike this year. The Nifty lost 1.7 percent during the week, although the mid-cap and small-cap indexes outperformed. A failed attempt on Friday to close above the 9,800 mark in Nifty placed the bears in commanding position.
The rupee continued its fall and hit a fresh six-month low against the dollar. The decline in the rupee has been triggered by persistent selling by FIIs on worries of overshooting the fiscal deficit and escalating tensions between North Korea and the United States.
U.S. President Donald Trump unveiled his ambitious tax reform plan, proposing to cut tax for individuals and corporations in a "once-in-a generation" opportunity to overhaul America's tax code. The proposal seeks to simplify the tax code and nearly doubles the standard deduction. Corporate tax rates are proposed to be cut to 20 percent from 35 percent as part of an effort to make U.S. businesses more competitive globally.
In India, Prime Minister Narendra Modi announced that the government will spend 163.2 billion rupees ($2.5 billion) under the Saubhagya scheme to electrify each home in India by December 2018, ahead of an earlier deadline of March 2019. The plan will be funded by a mix of federal government grants, investment by state utilities and loans. 'Power for all' is an ambitious plan and the political gains are huge if they succeed.
Voices are already getting louder about how the government will maintain fiscal prudence. The government aims to shrink its budget deficit to 3.2 percent of GDP by FY18 from 3.5 percent the previous year. With elections nearing, pressure has been building on Modi to spur investment and create jobs. We could see a few more populist schemes being rolled out in the run-up to the Gujarat election this year and the 2019 general election.
The government has directed state-owned companies to step up capital expenditure in a bid to boost the economy. As such, private investment and credit growth are yet to pick up and bad loans are on the rise. Further, the government met industry representatives including exporters to address problems faced by them with regards to the Goods and Services Tax (GST).
Nifty 50 changes came into effect this week and it's now back to 50 constituents as Tata Motors DVR is not part of the pack. Other stocks excluded are ACC, Bank of Baroda and Tata Power. Replacing them in the list are Bajaj Finance, Hindustan Petroleum and United Phosphorus.
For the coming week, markets will keenly watch the RBI policy meeting on Oct. 4. Market participants expect the central bank to leave rates unchanged as CPI inflation may inch upward in the coming months and is expected to be in the range of 4.5-5 percent in March 2018. However, with GDP falling to a three-year low of 5.7 percent in the April-June quarter of FY18, the industry is demanding a further cut in the repo rate.
Automobile counters will be watched as companies will start declaring sales numbers for the previous month from Oct. 1.
On the macro data front, data on manufacturing PMI is expected on Tuesday, followed by services PMI on Thursday. On the global front, the euro zone Markit PMI Composite data for September will be released on Monday, while crucial U.S. nonfarm payrolls data for September will be out on Friday.
The Indian markets have just started correcting and it's natural for liquidity flows to continue, assuming that the markets are providing bargains after the initial fall. However, this very liquidity will disappear if there is further fall of another 5 percent. Most new retail participants pouring in money via mutual funds would be seeing a major correction and the consequent losses for the first time. One needs to see whether they step back or continue believing in the long-term story.
A major support level for the Nifty is in the range of 9,600-9,650, which if broken could see the markets correcting further to 9,200-9,250. We have entered a "sell on rally" phase.
(Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.)