1. ‘Passing of GST will be icing on the cake for stock markets’

‘Passing of GST will be icing on the cake for stock markets’

A good monsoon will also cool off the food inflation, albeit not immediately, but certainly over the next couple of months.

By: | Updated: July 18, 2016 9:57 AM
bse sensex nse nifty GST The last four months have seen the domestic equity markets move up by over 4,000 points on the Sensex since Feb 2016 from a level of 23,000 to the current level of 27,836. (Photo: Reuters)

The last four months have seen the domestic equity markets move up by over 4,000 points on the Sensex since Feb 2016 from a level of 23,000 to the current level of 27,836. What makes this move even more significant is that it has come in the backdrop of Brexit and Rexit.

While this rise in the Indian markets has been turbocharged by the global rally in the past one week, there is also a fundamental reason which are essentially more local in nature. It is the rains. After two consecutive years of drought, the hinterlands of India are getting very good rains. Monsoon is the biggest trigger for rural consumption.

Expectations of a revival in rural consumption is the single-most and indispensable factor which has brought cheers to the Indian market. Different sectors – from FMCG to consumer durables to two-four-wheelers to cement – have their fortunesdirectly linked to rural consumption.

A good monsoon will also cool off the food inflation, albeit not immediately, but certainly over the next couple of months. This will raise the expectations of reduction in interest rates which can in turn provide further trigger for fresh investments.

The government is doing its bit by increasing public spending, and rightly so, a lot of projects have been announced in rural development and infrastructure. One of the recently announced schemes to provide rural connectivity through mini buses will definitely give a boost to commercial vehicles manufacturers.

A new model law that would allow cinema halls, restaurants, shops, banks and other such workplaces to remain open 24/7 has the potential of increasing employment as well as consumption.

The recently released IIP data shows positive activity happening in the power, steel and cement sectors. A growth in these sectors is very much positive news as it suggests that the wheels of the economy have started moving. It has the potential to cause an uptick in the cyclical stocks which have been lying low for a long time.

The IIP numbers also show that the green shoots of the economy have started spurting. The implementation of the Seventh Pay Commission will mean more income in the hands of people and this will further drive consumption. The fact that SIPs in mutual funds are growing at a very healthy pace is also a vindication of the shift in savings from bank accounts to capital markets and hence adds to the upward movements in the market.

The relatively lower and more importantly stable price of crude, ample forex reserves, stable rupee are some of the other factors which are helping the cause of the rally in the market. And the passing of the GST will probably be the icing on the cake.

The Indian economy thus is surely in a sweet spot, and certainly the rally in the equity markets is a result of the same.

(The writer is market strategist at Geojit BNP Paribas)

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