Sensex, Nifty at 11 month high; 5 factors that will drive markets

By: | Updated: July 12, 2016 10:40 AM

The BSE Sensex advanced over 100 points in the early trade, while NSE Nifty hit 8,500-level again.

Sensex, Nifty, monsoon, gstMonsoons play an imperative role in the growth of the Indian economy.

Domestic benchmark indices BSE Sensex and NSE Nifty on Tuesday hit their fresh 11-month high with all sectoral indices led by power, metal, banking were trading in green.

The BSE Sensex advanced over 100 points in the early trade, while NSE Nifty hit 8,500-level again. Sentiments remained firm on account of firm buying by domestic investors and foreign inflows ahead of IIP and inflation data to be released later in the day amid a firming trend overseas.

In this backdrop, Zerodha, chief operating officer, Venu Madhav list out five factors which will drive stock markets further.

1. Monsoons: Monsoons play an imperative role in the growth of the Indian economy. It’s a known fact that agriculture has been the backbone of the Indian economy for the longest time, contributing close to 14 per cent to the GDP and the sector is largely reliant on the monsoons. Good monsoon increases farm production which translates to better income to farmers providing them with higher spending powers. It also enables farmers to repay agricultural loans faster, which then boosts the balance sheets of banks benefiting the economy as a whole. Inflation in India is largely due to energy prices coupled with prices of food items. Given the lower energy prices, the increased crop yield also helps to keep a check on the inflation thereby giving the Reserve Bank reasons to cut interest rates which further boosts the economy.

A stronger economic forecast can only raise an investor’s sentiments and the direct effect of good monsoons is felt on the markets. Stocks of the FMCG, banking and autos sectors seem to do well around times when the monsoons have been better than estimated.

2. Brexit: In the aftermath of the Brexit, the global economies had taken a tumble and are inching their way back up. One should know that the vote for Brexit was not a determinative of whether the UK would leave the EU. With no leadership to drive Brexit, there are rumors floating of the referendum being revoked and Britain being reinstated into the European Union.

While this may just remain a rumor for now, If this does happen, it’ll come as a silver lining to the Financial markets worldwide and will reinstate faith and further contribute to the rise in the Global & Indian markets.

3. Implementation of the GST: The idea behind the implementation of the GST is to simplify the current Indirect tax regime wherein different types of taxes like Service tax, excise duty, VAT etc. are levied by State, Central and Local authorities separately. The bill aims at subsuming these different types of taxes and brings them under one single head by having a uniform tax rate across goods and services. The implementation of the GST will lower the effective tax rates; eliminate cascading of taxes thereby driving consumption growth.

While GST Bill has been successfully passed in the Lok Sabha, it remains to be seen when it would be passed in the upper house of the Rajya Sabha. It has been said that the successful implementation of the GST will contribute to 100 – 150 rise in the growth of the GDP

4. Recovery of the Chinese Economy: Investors should start worrying about China’s looming debt crisis. To maintain the growth rate China is injecting more credit in to the system. This new money is being used unproductively and most of it is used for servicing the existing debt. The main concern is also that the banking sector in China has been pushing out new lending aggressively, but with slowing economic growth, many loans have not gone to create more factories and jobs but to financial assets that have been leveraged to boost returns. About one-third of global recovery is fueled by China and now the question is how long it will maintain this undoubtedly unsustainable model.

5. Fed Rate Hike: The Global markets have always been wary of a Fed rate hike. While there have been no rate hikes this year owing to the Brexit event and China’s unexpected slowdown last year, the Indian markets have already discounted a 50 basis points hike for the current year. If the Fed in its next few meets decides to increase rates more than 50 bps, it could create a sort of negative sentiment because of the increased borrowing costs.

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