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OP Thomas: US rate decision, domestic prices to set Indian equity markets’ direction
December 12, 2016
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Exclusive to The Gulf Today

The week ending Friday witnessed sharp upward moves in key indices with Nifty inching towards 8300 levels. However, there seems to be reluctance at higher levels due to profit-taking. Nifty ended the week with a 2.16 per cent gain or 174.95 points at 8261.75. The Sensex too closed higher with a spurt of 516.52 points or 1.96 per cent at 26,747.18.

One of the key triggers for upsurge, except Wednesday, when it fell sharply after Reserve Bank of India announced its bi-monthly policy, was the overall global sentiment especially in the US.

Investors were betting high on the hopes, Fed would cut interest rates and the Trump administration would usher in fiscal stimulus no sooner it takes charge of its office in mid January. It seems US rate decision, domestic prices to set Indian equity markets’ direction.

Coming back to Wednesday, the RBI left policy rate unchanged at 6.25 per cent. The markets had priced-in at least a 25 bps cut. Nifty shed about 40 odd points from its previous close. However, the recovery was sharp the following day and the uptrend resumed till the weekend though with intermittent profit taking that prevented sharp surges.

There wasn’t any good news for markets to cheer on the domestic front, though overall growth in the long term remains intact. Services sector has already been hit due to the government’s ongoing demonetisation drive of high value currencies and the cash crunch that remains due to restrictions on cash withdrawals from saving accounts.

Industrial output for October was back in the negative territory at 1.9 per cent thus beating most analysts that predicted over three per cent growth. Most experts say the drop has been due to high interest rates. Now on account of demonetisation other parameters like good monsoon, wage hikes of government employees etc that favoured an improvement in consumer demand stands submerged. However, the demonetisation move is seen as a temporary setback in the manufacturing activities but in the near term the growth is seen subdued till the fiscal year end March 2017.

For the coming week, the domestic equity markets will reflect the Fed decision on interest rates Wednesday. Investors are expecting a hike in Fed rate and if that is so, foreign institutional investors (FIIs) from emerging markets are likely to pullout to invest in US debt.

Last week, FIIs at home turned net buyers of equities in the cash segment. Their net buying was Rs12.26 billion while buying by domestic institutional investors was a dismal Rs 3.4 billion.

One needs to watch if Nifty can hold at the current levels as selling pressure is likely to gather momentum this coming week. Other trigger would be the developments in the ongoing winter parliament session. The government is still struggling to get across a consensus between the states and the centre on the revenue sharing of the crucial uniform taxation called Goods and Services Tax.

In the global scenario, China’s foreign direct investment data , due for release Monday, will be keenly watched, so would be its production data that will be released Tuesday. Japan’s industrial data will also be released Wednesday and so would Euro zone, besides the much-awaited Fed meet on rates.

Nifty for the week ahead is largely seen range-bound. If it breaks the 8300 mark expect a 200 point upward swing and if Nifty breaches the 8000 support mark, next support is at 7800.

THE AUTHOR
IS A BUSINESS ANALYST COVERING
INDIAN MARKETS, BANKING AND ECONOMY

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