Domestic, global factors keep markets jittery

It was a week of volatility for stock markets across the globe

with India being no exception. After putting aside unfounded fears triggered by Donald Trump’s victory, the Indian stock markets, much like their global peers, reclaimed much of its lost ground on Thursday, but ended the week lower by over 2%. The Sensex, a barometer to gauge the mood of the broader market, stood at 26,818 levels at Friday’s close. Although Prime Minister Narendra Modi’s master stroke to fight the menace of black money is being seen quite positively by investors, the fact that the demonetisation move would contract the consumption demand in many sectors dampened investors’ sentiments. “There is also a fear in the market that less discretionary spend (less demand) might take Indian economy towards a deflationary path in the next two to three quarters,” says a Delhi-based stock analyst. The industries that are likely to see subdued demand for at least next two quarters are real estate, FMCG, apparels and auto as there would be less cash in the system to buy goods and services from. 

The demonetisation move is also seen by many as the start of the virtuous cycle benefiting Indian economy in a big way. Indian markets would also get a big boost from domestic issues many of which are being deftly handled by the current government. The possibility of the Sensex reaching over 31,000 levels by March 2017 looks realistic based on expectations of reduction in corporate tax to 25%.

“But going forward, we are positive on the Indian market on the back of lower inflation, improvement in rural sentiment and the stronger (commitment for) reforms,” says Vaibhav Agrawal, Head of Research, Angel Broking. The demonetisation move is also seen by many as the start of the virtuous cycle benefiting Indian economy in a big way. Indian markets would also get a big boost from domestic issues many of which are being deftly handled by the current government. The possibility of the Sensex reaching over 31,000 levels by March 2017 looks realistic based on expectations of reduction in corporate tax to 25% as promised by the Modi government. Moreover, lower inflation, due to the demonetisation move, is expected to bring down interest rates further, thus benefiting many small and medium enterprises which remain largely dependent on banks for their borrowing needs. The rally seen in banking stocks indicates that the demonetisation move would steer huge quantum of money (as deposits) with Indian banks. “The larger deposit base should encourage banks to do onward lending (hopefully) at cheaper rates,” says Mustafa Nadeem, CEO, Epic Research Pvt. Ltd.   

Markets elsewhere have also come to terms with the triumph of Trump, thinking possibly that “President” Trump would be less rhetoric in his action than “Candidate” Trump. Market watchers are upbeat that the two events (Trump and demonetisation) are quite positive for India in the medium to longer term. The huge arbitrage that Indian IT professionals provide to the American economy cannot be easily ignored by Trump.