Indian equity markets: The ride can be bumpy ahead

Nov 04 2013, 09:21 IST
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Markets are currently at an all time high on the back of strong FII flows, receding worries on the domestic macro front. Markets are currently at an all time high on the back of strong FII flows, receding worries on the domestic macro front.
SummaryMarket euphoria continues with US Federal Reserve getting into a wait-and–watch mode.

Since early September, 2013, Nifty surged 13.6 per cent on the back of strong FII equity flows (~ Rs 28,864 crore) despite mixed signals on the macroeconomic front. Elevated and stubborn CPI (9.84 per cent) and WPI (6.46 per cent) in September; lower-than-expected August IIP (0.6 per cent) growth; and downward revision of GDP forecast were the negatives for the market. Exports growth (11.15 per cent) in September helped to improve sentiments and so did the RBI’s October balanced and anticipated monetary policy — repo rate hike of 25 bps and reduction of MSF rate by 25 bps — but the surprise element was the increase in liquidity through term repos of 7-day and 14-day tenor to 0.5 per cent of the NDTL from 0.25 per cent. Justifying its stance, RBI noted that liquidity conditions have eased in the system with the average drawal on the MSF has declined significantly from about Rs 1.4 trillion by mid-October to Rs 40,000 crore, and money market rates have fallen by 125 basis points.

The market euphoria continued with the US Federal Reserve getting into a wait-and–watch mode before pressing the taper button, which in our view is unlikely to happen before March, 2014. The Fed sees the improvement in economic activity and the job market since it began its asset purchase programme as consistent with growing underlying strength in the broader economy but reiterated that it will wait for more evidence that progress will be sustained before adjusting the pace of its asset purchase.

Markets are currently at an all time high (Nifty 6,307) on the back of strong FII flows, receding worries on the domestic macro front; expectations around a political change in 2014 and Q2 FY14 earnings beating expectations and progressing well for India Inc.

However, with retail investors participation at its 10-year low, the euphoria is missing even at such elevated market levels. The next trigger for the market, we believe could be the state elections in four states — MP, Rajasthan, Chhattisgarh and Delhi — which could have a priming effect on the general elections in 2014.

That said, lingering concerns over fiscal deficit overshooting the budget estimate in an election year, hardening interest rates, slow investment growth, elevated inflation and a sluggish Gross Domestic Product (GDP) growth may create roadblocks for the upward spiral in the equity markets.

However, the downside risks do not

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