NIFTY index, considered as a broader equity market index, has corrected approximate 13 per cent since August 28, 2018. Market has corrected due to various factors. Global stock market correction is putting pressure on Indian market too. If we anlayse, US FOMC (Federal Open Market Committee) has kept increasing the Fed rate multiple times in the last 18 months. The 10-year US treasury that was trading sub 2 per cent two years ago is currently trading at 3.2 per cent. On risk adjusted basis, the US treasury yield looks attractive for institutional investors of developed markets as well as emerging markets. India also witnessed a Rs 48,000 crore foreign portfolio investment outflow to the US market.
In addition, equity market has corrected due to other important factors like increase in crude oil price, depreciation in rupee, credit default of IL&FS and its group companies, possible ALM mismatch in NBFC sector and elections.
Brent crude which was trading at $45 per barrel in June 2017, touched $86 per barrel in the first week of October. Since India imports 85 per cent of crude oil, our country’s CAD as well as fiscal deficit are more sensitive to global crude oil price movement. Every $10 increase in crude will put a pressure of 40 bps in India’s retail inflation.
Rupee which was trading at 63 to dollar in January 2018 touched 74.4 in the first week of October. That is equivalent to 18 per cent depreciation. RBI had pumped more than $21 billion in the currency market to strengthen the rupee. Currency depreciation is putting pressure on the import sensitive sectors like industrial commodities, electronics & digital instruments imports, etc.
In the last 6 weeks we have seen major turmoil in the NBFC sector due to IL&FS crisis. IL&FS default has led to major redemption in the liquid, credit fund, short term funds, etc of various mutual funds. Equity shares of NBFCs corrected due to concerns on tighter liquidity, likely asset liability management challenges in the NBFCs etc. Further, RBI said that it would tighten the rules of NBFC. It is expected that the NBFC, including HFC’s, growth rate would slow down due to the above developments.
Five major state elections are due before December 2018. Adverse election results will create trouble for the NDA government and in turn impact the 2019 general election outcome. Instability in the Central government will affect the economic reforms, employment rate, infrastructure growth, possible inflow from foreign portfolio investments as well as foreign direct investments.
Meanwhile, institutional investors will be closely watching on quarterly financial results that will be out by now and taking calls on the future market direction. It is expected that since equity market has corrected at a good percentage, selective industrial sectors might recover soon. We are anticipating the rural theme to continue doing well. Expecting currency depreciation, we think export-oriented sectors like pharmaceuticals, information technology and agro chemicals will do well. Selective auto OEMs & auto ancillaries, FMCG too will do well.