Markets await rate cut of 40 bps by RBI

Indian equity markets bounced back sharply on the last day of the week, after being on the downward journey throughout the week. Markets started the week on a negative note after a drone attack on the largest Saudi Aramco's oil installations.

The US blamed Iran for the attack leading to a rise in geopolitical tensions in the Gulf region. Crude oil price spiked to $71/bbl but later corrected to $64/bbl as Saudi officials said they had restored just under half the output lost at the Abqaiq plant.

Further, the markets remained range-bound with negative bias post mixed signals from the US Fed on the direction of future rate cuts. But on Friday markets rallied more than 5% post-Finance Minister’s announcement of corporate tax rate cut to 25.17%. She also offered a lower rate of 17.01% for new manufacturing firms to boost the economic growth rate from a six-year low by incentivizing investments.

Nifty 50 closed at 11,274 with gains of 1.8% for the week, while Sensex closed at 38,015, up 1.7%. Nifty climbed up 569 points (5.3%) on the last day of the week to close at a two-month high. Nifty touched a seven-month low of 10,691 before the FM’s announcement. Friday was the historical day in the stock market – for the first time biggest corporate tax rate cut which led to the highest surge in absolute terms for both Bank Nifty (up 10%) and Nifty (above 6%) on an intra-day basis. Buying interest was seen in the NSE Midcap Index which outperformed with gains of 2.3% for the week. However, NSE Small Cap saw a very marginal gain, up only 0.4%.

On the sector front, most sectors closed in green baring the sectors like IT (-1.5%), Pharma (-0.6%), Media (-3.7%) and Real Estate (-1.0%) – which will not benefit much from the recent corporate tax cut announcement. On the other hand, FMCG (+4.3%), Auto (+3.3%) and Banks (+3.1%) were the biggest gainers while Financial Services and Metals were up 2-3%.

FIIs were net sellers during the first four days of the week and sold equities worth more than Rs 3,400 crore. But they turned net buyers on Friday by buying equities worth Rs 36 crore. DIIs, on the other hand, continued to remain, net buyers, having bought equities worth more than Rs 4,800 crores during the week.

Going forward, the key event to watch out for will be RBI monetary policy scheduled on October 4, where markets expect RBI to follow suit and cut policy rates by 40 basis points to bring down repo rate to 5%. On the global front, markets would keep an eye on US GDP data along with developments on the US-China trade war, geopolitical tensions, oil, and crude movement.

Technically, Nifty index managed to hold previous day’s low and witnessed a strong momentum for the most part of the session and headed towards 11,380 zones. It formed a Big Bullish candle on the daily and weekly scale and made a record historical intraday gain for the index.

It rallied by around 600 points as surpassed its multiple hurdles of 11,111 zones and extend towards next key levels of 11,333-11,380 zones. It has managed to reclaim its 50 DEMA and formed a short term bottom out the process of Daily and Weekly scale with broad-based buying across the sector. Now it has to continue to hold above 11180 zones to extend its move towards 11,380 then 11,500 zones while on the downside supports are seen at 11,111 then 11,050 levels.

(The writer is the Head, Retail Research, MOFSL)