Royal election battle ahead – market betting big, caution advised
April began on a positive note with March once again catching the bears on the wrong foot and frantic short covering was seen. The consistent buying by the FIIs resulted in the Nifty touching an all-time high and while writing this article it is consolidating near 6700 levels.
The macro picture
In the last three months, headline inflation cooled off significantly due to softening food prices, but vegetable prices are unlikely to ease further as they approach the end of a seasonal correction. However, sticky core inflation holds upside risks due to fuel increases, high wages, and supply chain bottlenecks, which are likely to hurt growth levels. The CAD is also expected to cool off to USD 35 billion, far lower than what was expected in our revised budget estimate. Rupee finally breached the 60 level against the dollar to close at an eight month high of 59.89 led by consistent fund flow.
Rupee happens to be the best performing currency among emerging market currencies in 2014 and has gained more than 3% against dollar this year. IIP grew 0.1% in January after (-) 0.2% revised print for December 2013. However, on MoM basis, it showed a strong growth of ~14% after contraction of 2.8% in December. As expected, the investment cycle remained weak with the capital goods contracting by 4.2%.
However, continued contraction in manufacturing and capital goods leads us to believe that a sustained pick up in investment growth is still some way off. We are also unlikely to see any sharp improvement in industrial growth in the rest of this fiscal. In line with market expectations, RBI left the key policy rates unchanged in its first bimonthly monetary policy. The Repo rate and CRR remained unchanged at 8% and 4% respectively. RBI placed its policy call amidst a cautious outlook towards inflation and muted growth prospects.
The overall performance of the global markets has been stable in March. Some concerns were seen in China in terms of less than expected industrial production, retail sales, and worries about possible loan defaults by corporate.
Domestic political events will hog the limelight in April and the market‘s upsurge is already discounting a market-friendly NDA coming to power. However, challenges will remain to be addressed irrespective of the nature of government coming to power. Therefore, a sensible approach is advised where any high volatility is taken advantage of for accumulating good quality blue chips, which will perform irrespective of sluggish economic growth.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.