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RBI’s MPC To Weigh On Market As It Enters Consolidation Mode

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RBI’s MPC To Weigh On Market As It Enters Consolidation Mode
Yagnesh Kansara - 03 August 2020

Last week, it was said that the upward march of the equity market is expected to continue for the seventh consecutive week. However, the seventh week ended last Friday saw the winning streak coming to halt as markets ended lower on 4 out of the 5 trading days to end the week with minor losses. The global events like US Fed meeting on interest rates and more than expected US fiscal deficit took its toll on the market, which was flagged off from here too.

After the US Fed, last week it is India’s Reserve bank of India (RBI)’s turn to be in limelight this week. It’sMonetary Policy Committee (MPC) is meeting in Mumbai during 4-5-6 August (Tuesday-Thursday) to undertake review of monetary situation. This meeting is important as it will not only decide whether to cut interest rates further but whether to continue with Moratorium, whose term ends at the end of this monthor to introduce one-time restructuring of corporate loans for Micro, Small and Medium Enterprises (MSME) sector.

During the week, the Bombay Stock Exchange benchmark S&P Sensex lost 522.11 points (down 1.39 per cent) while the National Stock Exchange (NSE)’s Nifty-50 lost 120.70 points (down 1.08 per cent) to close the week at 37,606.89 and 11,073.45 points respectively. In Friday’s trading too, Sensex and Nifty ended lower by 129.18 points and 28.70 points respectively.

Commenting on Friday’s closing, Vinod Nair, Head of Research at Geojit Financial Services, said, “Indian markets closed the session flat, with a negative bias. Following one of the worst quarterly US GDP data, Asian shares closed in the negative while European markets were also trading flat. In India, the uncertainty was visible as profit booking and post-earnings results performance of index heavyweights, impacted the benchmark indices”.

FPIs bought equities worth US$679 million over the past five trading sessions while DIIs sold US$261 million worth of equities in the same period. Investors need to be wary at these levels as valuations are now close to fair levels.

Markets are at extremely overbought levels and the optimism too seems to be at elevated levels. This can be gauged from the Rollover data in frontline stocks at the end of July F&O expiry. It suggests that complacency has crept in and majority of long positions have been carried forward to the next month. Such kind of extremely high optimism may lead to short term corrections, dealers said.

The listing of Rossari Biotech IPO is a case in point,wherein market participants gave a euphoric listing gain but within a week the fire power exhausted and this throws light on what lies ahead for the general market. The stock listed at 58 per cent premium over its issue price of Rs 425 per share at Rs 670 per share on July 23. After hitting all-time high of Rs 804, the stock closed at Rs 715 on BSE on Friday

The losses of -1.4 per cent in Bankex which was dominating the trend, weighed on market last week as sentiments turned bearish after the RBI’s Finance Stability Report (FSR) pointing a cautious assets quality outlook for the banking sector. FSR warned that the bad-loan ratio is set to worsen to 12.5 per cent in a base case scenario and 14.2 per cent in a severe stress scenario from 8.5 per cent in March 2020.

“Market also did not cheer the quarterly performance (Q1) of ICICI Bank and Indusind Bank”, said Sundar Sanmukani, Fundamental Head, Choice Broking.

The FMCG basket reported bleak quarterly numbers but this surprised D-Street as expectation was that demand for essentials during the lockdown should have not have been impacted but it did, therefore post numbers heavy weights like HUL and Nestle corrected. Market participants have always believed the FMCG sector to be a defensive play unaffected by any economic slowdown but that’s not always the case.

Nair said, Markets seem to be in a consolidation mode with momentum slowing down in the last couple of sessions. This trend is expected to stay since the uncertainties continue and volatility remains high. Investors are advised to remain cautious and accumulate quality stocks in this uncertain environment.

Broader markets outperformed the benchmark indices as BSE Midcap and Small-cap indices gained by 0.4 per cent each over the week. Market breadth turned in favour of the bears this week with 11 shares declining for every 10 gaining shares. Nifty Pharma surged by over 9 per cent as pharma stocks were in limelight. Nifty IT Index gained ~4.7 per cent and Metal rallied by 3.1 per cent. On the down side Nifty bank shed ~4.5 per cent after RBI’s financial stability report. Nifty Media index also declined over 4 per cent while the energy index fell 3.6 per cent.

Deepak Jasani, Head Retail Research, HDFC Securities, said, “Technically, while the Nifty has corrected for three sessions, the falls has been small and hence the short term uptrend has not yet reversed. This would reverse with a close under 10,894. Any pullback rallies in the coming week could find resistances at 11,151-11,238”.

Jimeet Modi, Founder & CEO Samco Group, said, “RBI’s stance on moratorium or onetime restructuring (COVID-19) will set the tone for the entire financial sectors for weeks ahead. In general, Bank Nifty has underperformed and pessimism continues to run high. Therefore, any move by RBI will create short term volatility in the banking stocks. Yes Bank’s capital raising was not lauded by the market as expected and hence it can be concluded that capital hungry sectors will remain under pressure going ahead. Investors are advised to remain cautious and partly book profits. They should wait for a sharp correction before making any fresh bets”.

Going forward, markets would react to the Auto sales numbers scheduled to release over the weekend. On the event front, they would also be keeping a close watch on the RBI monetary policy scheduled next week. On the earnings part, some of the prominent names like Bharti Airtel, Tata Steel, L&T, Lupin, Titan and Voltas will announce their numbers during the week along with several others.

Ajit Mishra, VP Research, Religare Broking, said “We reiterate our cautious view on the market and suggest keeping the leveraged positions hedged. Nifty couldn’t surpass the hurdle at 11,350 last week while the downside also remained capped. Going ahead, we feel it may continue to hover within the range of 10,950-11,350 and either side break would trigger the further directional move. Meanwhile, traders should focus on stock selection and managing overnight risk.

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