Markets to react to softening inflation in US and India

The Week Ahead

Softening of the US inflation has boosted market sentiments though Fed’s hawkish stance is a little cause of worry. Investors would now react to India’s inflation data, which came better than what was expected on August 12.

Despite mixed global cues, increasing geopolitical tensions and higher volatility, Indian equities are holding out well with strong buying emerging at lower levels. The Consumer Price Index (CPI) inflation eased for the second consecutive month at 6.7%, though still above RBI’s comfort zone. Any further moderation in inflation might slow down RBI’s aggressive policy rate hikes in subsequent MPCs.

The benefit of the recent moderation in commodity costs is likely to start accruing in 2HFY23E, which would boost corporate profitability.

Nifty has rallied by more than 2,500 points from June lows, and thus, has wiped out the entire decline for the calendar year to date and turned positive. It is, however, currently trading at 20x FY23 PE, which is above its 10-year average, thus offering limited upside in the near term.

While the overall momentum is positive, the markets may take a pause over here and consolidate after the recent sharp rally. Going ahead, a tug-of-war between global and domestic factors would determine the market direction. While large caps have already moved up, we expect outperformance from midcaps to continue from hereon. A lot of stock stock-specific action is likely to continue as we are in the last leg of results season.

In the week that went by, the equity markets witnessed fourth week of gains with Nifty crossing its December 2021 level of 17,354. Nifty/Sensex gained ~300/1,075 points (+1.7%/+1.8%) during the week to close at 17,698/59,463 levels.

Broader market too gained with Midcap 100/Smallcap 100 up 1.8%/1.1% for the week. Most of the sectors ended in green with metal and bank sectors being the biggest gainers – up 3%/4.6%. On the other hand, IT, pharma and FMCG were laggards during the week.

Foreign institutional investors (FII) bought to the tune of Rs 7,850 crore for the week while domestic institutional investors (DII) sold equities worth Rs 2,480 crore. In August so far, FIIs were net buyers of Rs 14,842 crore while DIIs sold Rs 4,244 crore worth of equities.

Global markets too continued their northbound journey after the US reported better-than-expected jobs data over the weekend while the US inflation data softened a little at 8.5% as compared to 9.1% the previous month. It led to a hope that the US Fed might taper down its aggression a little and raise interest rates at a slower pace than previously expected.

However, Fed has responded by saying that there will be no slowing down as inflation still remains at unacceptable levels.

On the other hand, consumer inflation in China increased in July to 2.7%, its highest level in two years.

Brent crude gained 3% this week, as recession fears eased, though an uncertain demand outlook capped gains.

On the domestic front, a return of FII flows and steady earnings led to another week of rally in the market, with the Nifty surging to a four-month high. It has gained 16% from the lows of June.