Nifty to extend recovery till 17800 levels with commodities turning benign and FIIs turning positive

The first week of August 2022 turned out to be a favourable one for the Indian stock markets. Nifty gained approximately 1.75% this week but consolidated mainly below 17500 amid high volatility. Although cross-border tensions between several countries have contributed to higher volatility in the market, the Nifty and Sensex have remained mainly on the positive side.

With several other factors favouring this positivity in the upcoming days, we are expecting the market to continue its upward slide. Nifty is expected to consolidate its recovery till 17800 levels with commodities turning benign and Foreign Institutional Investors (FIIs) looking positive towards the Indian markets.

Market reaction to RBI’s policy

The Reserve Bank of India (RBI) recently announced a 50 basis points hike in Repo Rate. On the expected lines, the bond market reacted negatively to this announcement with a 10-year benchmark G-sec yield moving up by 10 basis points to 7.25% from 7.15%. While this hike was largely on the expected lines, the negative reaction can be attributed to positive market positioning while the policy was declared.

The objective behind this RBI move is to manage the currency levels and prevent any sharp decline in the value of the Indian Rupees. Effectively, by hiking the Repo Rate, RBI seems to control both inflation and currency depreciation.

After this rate hike by the RBI, the debt market outlook, after almost two years, has started to look attractive. Investors can start to build their long-term fixed income portfolio by increasing their allocation to short to medium-term debt funds.

FIIs positive stance toward the Indian markets

Foreign Institutional Investors or FIIs have turned positive towards the Indian markets. With global geopolitical tensions impacting the bigger markets like the United States of America, China, and Britain, FIIs are looking to invest in emerging markets and India has been their top preference.

In the last week itself, FIIs have invested over Rs. 11,500 crores in secondary markets. This change of trend was first observed in July's first week when FIIs’ selling spree stopped, and by the end of the month, they turned into net buyers.

This positive stance by the FIIs is expected to drive the Nifty towards the 17800 levels in the coming week. However, as FIIs are taking the front seats, domestic institutions have taken the back seats. This is evident from the fact that Domestic Institutional Investors or DIIs sold redeemed close to Rs. 12,00 crores last week.

Crude prices at a six-month low may lend support to markets

Crude prices touched the six-month low this week owing to increased geopolitical tensions. A breakdown in brent crude prices below $98 should help in decreasing the inflation rate, which is positive for the equity markets.

Brent crude oil is currently trading at US$ 94/bbl as compared to US$ 113/bbl, which is the average rate for FY 2023. Among the reasons behind this fall in crude prices is the decision of Opec+ to increase its oil production by 1 lakh barrels per day, leading to a build-up of the crude inventory in the US. Also, the potential destruction in demand due to the fear of recession is weighing on crude oil prices.

How have various sectors performed?

· Banks

The increase in the repo rate hike might impact the banks’ earnings a bit. But despite the hike, credit growth is anticipated to remain healthy at 10 to 12 percent for FY 23.

· Metals

After the levy of export duty, domestic steel prices saw a decline of about 15% in the period of one month between May 2022 to July 2022. However, since the first week of July, domestic steel prices have witnessed several rebounds and are hovering around Rs. 59,500 per tonne. In the backdrop of range-bound domestic steel prices, the recent sharp fall in coking coal prices augurs well for Indian steel players. However, this impact is expected to be seen in the third quarter.

· Automobile companies

Auto companies witnessed steady wholesale dispatches during July 2022. The Private Vehicle Manufacturers outperformed the Original Equipment Manufacturers, riding on strong order books, exciting new launches, and elongated waiting periods. The auto ancillary space also reported steady performances with a healthy growth outlook amid a recovery in sales volumes and the introduction of new tech-heavy products.

· Pharma

The US Oral Solid Generics Space continues to remain challenging due to factors like pricing pressure and higher operating costs. This was evident in the Q1FY23 results announced by companies such as Lupin and Alembic Pharma. However, companies that focus on complex generics such as Sun Pharma and Cipla have reported better sales in the same period.

· Paint

Paint companies reported strong growth volumes during the first quarter of FY23. Demand from Tier III and Tier IV cities and aggressive product launches are the reasons behind this growth. Companies like Asian Paints and Berger Paints witnessed strong growth amid the rising demand for decorative paints. This growth was observed despite the price hike of almost 25% in the last two years.

To conclude

The overall picture for the short-term growth looks positive. The reasons are favourable RBI policy, a decline in crude prices, and a positive stance of FIIs towards Indian markets. Nifty is expected to extend its recovery to 17800 levels in the coming week. It can also go beyond 18000 but it depends on how geopolitical tensions and market results pan out.

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