Markets May Continue Dancing To The Tunes Of Global Cues Till Budget Is Tabled

Three Cs, crude, China and currency are currently dominating the global equity markets and Indian equity markets are no exception. In last few months we are observing that the equity markets are closely following the crude oil markets. Although the volatility in both the markets may be of varying degree, crude being more volatile, the direction remains the same. The co-relation between returns of Nifty-50 and Brent crude oil is positive for last couple of months and is around 0.4. Among all other reasons, slowdown in the demand for crude oil from world’s second largest economy, China and at the same time more supplies from the United States, Iran and Libya tilted the balance in favour of supply and hence fall in crude oil prices is being noted.

The Chinese economy, which during the last year grew at its slowest pace in last quarter century, is not only impacting the crude oil markets but other commodities and global economy too. In order to keep its economy growing by exporting more, China is trying to depreciate its currency under the pretext of liberalising its currency, this is creating other set of destabilising problem for the global economy and hence the equity markets. All these three factors will take their own time for readjustment and hence till than we will continue to see the choppiness in the markets.

Last fortnight also we saw in a surprise move, Japan joining many European central banks in adopting a negative interest rate strategy. This unorthodox move is being adopted to prevent deflation and revive the growth. The markets reacted positively to the news and Indian frontline indices went up by two per cent.

Nonetheless, they started falling again. These stimuluses will have a limited sustained impact on the markets until and unless the situation improves on the ground. If we look at the results for the quarter ending December 2015, of almost 100 companies excluding financials and oil companies, we find that their topline growth has remained weak. On sequential basis, they have declined by 1.5 per cent while on yearly basis they have declined by almost 7 per cent. There are couple of reasons for such fall- first it shows the inherent weakness in the demand and secondly, the fall in commodity prices that is leading to lower realisation. Nonetheless, slump in commodity prices has helped India Inc. in posting growth at a net profit level, which has grown at one per cent on a yearly basis. There are some pockets of outperformance, such as some IT and private sector banks, but they are few and far between. Banks overall, remain Achilles Heels for India Inc. performance.

Last week we also saw RBI maintaining status quo in terms of key policy rates. This was widely expected as of late we are seeing inflation measured by consumer price index is inching up and government is also indicating to open purse strings to revive growth. Under such circumstances, RBI decided to wait for further data on inflation and reforms in the forthcoming union budget. Looking at the Governor’s record, if government continues with its fiscal prudence and union budget comes on the expected line, you may not be surprised that RBI cuts policy rates before the next RBI policy meet. Therefore, the budget will be the key trigger point going forward for the market and till then it will remain the slave of global happenings.