Indian market continued with its positive momentum in the new year for the second week in a row, with both Nifty/Sensex rallying 443/1478 points (+2.5% each) to close at 18,255/61,223. The broader market outperformed with midcap 100/smallcap 100 up 2.8%/3.6% respectively. Foreign institutional investors (FII) after being net buyers in the first week of the new year, again turned sellers and sold equities to the tune of Rs 4,000 crore for the week. Domestic institutional investors bought equities worth Rs 3,600 crore during the week.
Global cues were mixed as US inflation data rose 7% in CY21, the biggest annual increase since 1982, influenced by supply chain disruptions and labour shortages. There were hawkish comments from a slew of US Fed officials indicating faster interest rate hikes to combat inflation. However, Fed Chairman Jerome Powell showed confidence in the US economic recovery and reiterated that the central bank would tackle inflation. On the other hand, there were a couple of other global macro data points which came better than the expectation, thus providing some confidence.
On the domestic side, the market continued with its rally on the expectation of a pro-reform budget, strong corporate earnings and the low impact of the 3rd Covid wave on the economy. However, the retail inflation hit a six-month high of 5.59% in December while the Index of Industrial Production (IIP) data came below expectation which led to some cautiousness in equity markets. Investor sentiments were also hit on the last day of the week post the United Nations report which predicted India’s GDP at 6.5% in FY22 from its earlier forecast of 8.4%.
Record high inflation in the US is dampening the sentiments in an otherwise positive macro data environment. Nifty has recovered sharply by more than 10% from its recent lows of 16,400 levels in just 20 days. The low impact of the Omicron variant and positive macro data points have helped improve the sentiments.
Valuations, however, are no longer cheap and require strong earnings delivery for the sustenance of positive momentum in the market.
Investors continue to monitor the impact of the central bank’s tightening of monetary policies and the spread of the Omicron Covid-19 variant. In the previous two decades, there have been two periods when the Fed has raised interest rates (June 2004 - June 2006 and December 2016 - December 2018).
The Nifty has performed well in those two periods, despite rate increases by the Fed. Going forward we expect the market to remain steady on the back of expectations of a strong corporate earnings season, upcoming budget and positive macroeconomic data.
The key risk in the near term might be any changes by the government in restriction norms due to rising cases.
(The writer is Head – Retail Research, MOFSL)
Deccan Herald is on WhatsApp Channels| Join now for Breaking News & Editor's Picks