The week ahead: All eyes on inflation data

Equity markets continued their northbound journey for the third consecutive week with Nifty reclaiming its Dec 2021 level, thus wiping out the decline seen in 2022.

Nifty/Sensex gained ~239/818 points (+1.4% each) during the week to close at 17,398/58,388 levels. The broader market, too, gained with Midcap 100/Smallcap 100 up 2.1%/1.6% for the week. Except for realty, all the sectors ended in green with IT, auto and metals gaining more than 2%.

Foreign institutional investors (FII) were buyers throughout the week and bought more than Rs 5,000 crore (till Thursday) while domestic institutional investors (DII) sold equities worth Rs 1,200 crore (till Thursday).

Global markets, also, gained during the week, ignoring escalating China-Taiwan tensions on the back of healthy corporate earnings and strong US Service PMI data. Brent crude oil prices fell below $94 per barrel after OPEC+ producers agreed to increase production by a small quantity i.e. 100,000 barrels per day in September.

On the domestic front, strong macro data, positive FII flows, steady earnings, softening of commodity prices and healthy progress in the monsoon led to the rally in the market. First quarter profits for the 31 Nifty companies that have declared their results so far, rose 12% YoY, single-handedly driven by BFSI. As the benefit of the recent softness in commodity costs start accruing in the second half of FY23, we expect other sectors to start contributing as well.

On the other hand, FIIs selling in the secondary market reduced to just Rs 6,568 crore in July 2022 - the lowest in the last 10 months - and sharply down from the record Rs 58,112-crore selling in June 2022. In fact, FIIs have been buyers throughout the first week of August, thus boosting sentiments.

On the economic front, India's manufacturing activity improved in July and rose to an eight-month high of 56.4.

Further, GST collection grew by 28% YoY to Rs 1.49 lakh crore in July 2022 – the second-highest ever. On the other hand, RBI, in its third MPC, hiked the repo rate by 50bps to 5.4% in an effort to contain inflation. Despite this, it has retained the CPI inflation forecast at 6.7% for FY23. However, it expects GDP growth to remain strong at 7.2% in FY23. With capacity utilisation in the manufacturing sector being above the long-term average and improvement in new orders in Q2FY23, this would fuel additional Capex requirements. This along with commodity prices cooling off (including crude oil), would support strong GDP growth.

Nifty has been consolidating below the 17,500 mark for the last few sessions, after rising up by almost 1,000 points in the previous week. At current levels, the Nifty trades at 20x FY23 PE, which is above its 10-year average, thus offering limited upside in the near term.

Despite mixed global cues including geopolitical tensions and higher volatility, Indian markets are holding out well with strong buying emerging at lower levels. While the pace of momentum may slow down, we expect the market to maintain its positive bias in the near term. It would be more of a tug of war between domestic and global factors which would keep the markets volatile.

Key events to watch out for next week would be US CPI Data on Wednesday and India’s CPI and Industrial Production data to be released on Friday, which could decide the central banks' further course of action.

(The writer is Head of Retail Research, Motilal Oswal Financial Services Limited)