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Loss of Momentum – A Bad Omen

by Suman Gupta

Markets opened with slightly positive sentiments on hopes of Monsoon upgrade by IMD which have revised monsoon forecast upwards from 96% to 98% of the long term averages. RBI has kept the interest rate unchanged for the moment but indicated strong possibilities for rate cuts post monsoon. India today has one of the highest real interest rates of 4% which is leading to lot of dollar inflows causing Rupee to appreciating massively this year, RBI will soon have to reduce the interest rates in order to correct this anomaly as inflation is hovering around 3% and nominal interest rates at 7% leading to huge difference of 4% which is the real interest rate. Because of such high real interest rates private investments have not picked up meaningfully and it is only the government that is continuing the spending spree. Some day this mismatch has to correct and even the private sector has to start making capex in order to have sustained economic growth.

Events of the Week: For the first time Rs 6000 Crs of bad loans from PSU banks have been put out for auction, the winning ARC (Asset Reconstruction Company) will have to pay 50% cash up front and balance 50% in a staggered manner. This is the first concrete action after a long time and if done successfully would herald a new chapter in the revival of PSU banks fortunes, shareholders too will rejoice. Even SBI recapitalized its capital by coming out with Rs 15000 Crs QIP keeping all stakeholders interest in mind.     

Technical Outlook: Nifty50 is moving higher with less participation from individual stocks. The index has formed a small body shooting star. The momentum as measured by MACD indicator is losing steam, this does not mean that the market will come down, it can still go higher, but trailing exits must be placed depending on the style and frequency of trades. Short term traders should keep their trailing exits at 9530 and positional traders and medium term investors can keep trailing exits at 9333 in Nifty50.

Expectations for the Week : This week the US FED will meet to decide for rate cuts if any, US is running at more or less at the highest rate of employment which makes a strong case for interest rate cuts, which if done would cause some worldwide selling in equities and India will not remain immune. GST rollout will be a massive challenge in a country as large and as India, it will throw short term spanners in growth momentum just like what demonetization did during second last quarter of the previous year. Already E-tailers are worried about shortages in the availability of goods prior to the festive season. Currently dealers are selling at discounts on fears of lapsing tax credits. People in general resist change and therefore GST will cause a short term blip in the growth numbers which the stock market has currently not factored in. Investors should adopt a cautious approach and invest through SIP mode for building long term portfolio of good stocks.  NIFTY50 closed the week at  9668.25 up marginally by 0.15%.

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