Volatility to continue, focus will be on domestic macros and FED policy

After a precautionary pause from RBI due to high food inflation and tepid pace in transmission of previous rates, market witnessed some consolidation. We feel that it is a well-thought unanimous decision of RBI to give ample time for the transmission of five consecutive rate cuts undertaken since January 2019. Further cut in economic growth forecast to 5% for FY20 seems to be more realistic, expecting more intervention from the Government to revive consumption and investments activity. RBI has noticed some green shoots in the economy from agriculture and exports, and foresees more supportive measures from the government. We should not expect this decision to completely change the trend of the market, rather a consolidation in rate sensitive stocks in the short-term.

Risk rewards at current levels is not very attractive due to clouds over economic growth outlook and premium valuation. Sharp fall (78% YoY) in equity inflows into mutual funds in November to Rs1312cr and muted participation by FIIs remains a concern for the market. Despite, fall in inflows into equity schemes monthly collection through SIP hit an all-time high of Rs8,273cr shows investor’s confidence in long term growth story. We expect volatility to continue in December as investors are closely watching the upcoming economic macros like CPI, WPI inflation and IIP data for any signs of progress in the Government’s effort to revive the economy. On global front, strong US job data and hopes for a delay in the US tariff deadline, while expecting more positive developments from US-China may induce US FED to remain status quo on monetary policy.

Concerns on fiscal path due to shortfall in GST collection may influence govt. to hike tax slabs which is likely to add inflationary pressure in the economy. As a result, India 10yr yield inched to 6.7%. On the other hand, auto sales plunged in November after positive vibes seen in October month due to festival season. Higher inventory and slower government spending in infrastructure would weigh on the demand in the near term. We expect that FY21 CV sales to remain muted owing to significant increase in the cost of ownership for BSVI compliant vehicles while the impending scrappage policy will reduce additional burden of the industry.

Given weak growth and deteriorating fiscal situation, the current premium valuation of blue chips are not likely to sustain. Having said that, falling interest rate, easy monetary policy across the globe and liquidity will limit the downside for the market. We expect volatility to remain heightened in the near term due to domestic as well global events and Nifty50 is likely to trade in the range 11750-12100.

Published: December 12, 2019.