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OP Thomas: Rupee, GST, crude prices to chart Indian stock markets’ direction
December 19, 2016
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Exclusive to The Gulf Today

The much-awaited US Federal Reserve rate hike finally occurred on Wednesday with a 25 basis points. The markets, though in the red, did not react to the hike as the 25 bps hike was a certainty. What is now to be seen is the three-round of hikes by Fed in the 2017 and the impact on the new US government under Donald Trump.

At home, equities moved in a trading range with Nifty swaying within a narrow band of 110 points. The BSE Sensex, ended the week lower by 0.96 per cent or 257.62 points at 26,489.56, while Nifty-50 lost 122.30 points or 1.48 per cent at 8,139.45.

The central government’s efforts to build consensus on the countours of the Goods and Services Tax (GST), along with rupee fluctuations and volatility in global crude oil prices, are expected to set the course for the Indian equity markets in the next week.

The Fed has signalled faster pace of reforms under Trump administration that had committed tax cuts and deregulation to boost the US economy. However, there is an issue of rising inflation and interest rates.

The markets globally are prepared for higher Fed rates in 2017, which is seen higher up to 75 bps from the current levels.

However-for the markets across-from the near zero rate in 2015, Fed has hiked rates by 25 bps in December 2015 and now in December 2016, which would be followed by three round of hikes in 2017, equities could be a risky affair in US over debts.

At the following press conference ptost rate cut, Fed Chair Janet Yellen’s statement that President-elect Donald Trump’s fiscal plans may be too much too late in the business cycle and be inflationary has got investors worried whether the Fed was turning hawkish again.

What seems to worry Fed is whether inflation would cross the 2 per cent target and hence there could be a case of hiking rates even more aggressively.

The other aspect of future rate hikes is that the Trump administration will have little room for the so-called tax cuts or it should let fiscal deficit for the committed plan to reduce taxes.  Besides, corporate performances would be adversely hit with higher rates.

Back home the government on Friday hiked retail fuel prices steeply by Rs 2.21 a litre on petrol to Rs66.10 and diesel by Rs1.79 to Rs54.57.

The move is seen inflationary, though prices of vegetables and essential commodities are on the decline, at the same time it may not lead to a hike in key policy rate.

For the coming week, global macroeconomic data like the US home sales data for November and the US crude oil inventories, both of which will be released Wednesday, can be a trendsetter for foreign institutional investors (FIIs). At home, it would be the rupee movement and the global crude prices.

Overall the market trend looks bearish. FIIs and domestic institutional investors (DIIs) continue to be sellers. Last week, FIIs net sold equities worth Rs13.71 billion in the cash segment, while DIIs sold a little over Rs4 billion.

So far, the trend for Nifty since mid November has been in a narrow range of 7950 and 8300. If either of the band is violated the trend can be confirmed. There seems to be strong support around 8000.  The rupee is seen weakening further against the dollar.

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

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