Nifty could soon hit 8900 mark

Shining equities carried on with positive momentum in light of improving quarterly earnings and macro-economic outlook. US markets are notching new at all-time highs driven by US President Donald Trump's promise to reveal details about fiscal stimulus, including tax cuts.

The prospect of deregulation, lower taxes and other fiscal stimulus—the centerpieces of Trump's campaign—is one of the central reasons for whopping rally in US equities.

Back home Nifty was up 0.6% on week-on-week basis discounting hawkish monetary policy. On sector front, top gainers were IT (+3.61%), media (+3.54%), infra (+1.68%), and realty (+2.97%) being the top outperformers for January while metals (-1.7%) and PSU banks (-0.90%) saw profit taking. Foreign institutional investors (FII's) were net buyers in cash and index futures for the week giving much needed sentimental relief to bullish traders.

On monetary policy front, the Reserve Bank of India (RBI) shifted its stance from 'accommodative' to 'neutral'. The Monetary Policy Committee believes that the sharp deceleration in headline inflation in recent months was on account of drop in vegetable prices though core inflation has been sticky.

In line with higher crude oil prices, volatile exchange rates, and fuller effects of the 7th Central Pay Commission (CPC), the Committee expects CPI to be in the range of 4-4.5% in 1HFY18 and 4.5-5% in 2HFY18, leaving hardly any scope for repo rate cut in near future. The Committee still believes that the adverse impact of demonetization on economic activity is transient. It has revised its FY17 GVA growth forecast from 7.1% to 6.9% and projects FY18 growth at 7.4%. Overall, with the RBI shifting its focus entirely to the 4% inflation target, we believe rate-cuts cycle is behind. In fact, if headline inflation moves towards 6% (we expect it to be 5.8% in 4QFY18), there could be a serious risk of a rate hike towards the beginning of 2018.

Alarmingly, Index of Industrial Production (IIP) declined (-0.4% YoY) in December 2016, as against +5.7% in November and much lower than market consensus of +1.2%. It implies that IIP grew only 0.3% YoY in 9MFY17, marking third-worst growth in the corresponding period over past 35 years. IIP contraction was primarily driven by an unexpected broad-based fall (-2% YoY) in the manufacturing sector, despite a very favorable base.

Mining & electricity production growth, however, was decent. It appears that demonetization has hurt the industrial sector, as all labor-intensive industries, such as textiles, apparels, tobacco and leather products, witnessed a contraction. However, the situation is expected to improve from 2017. We thus expect IIP growth of 1% YoY in FY17, as against 2.4% in FY16.

Key highlight of Q3FY17 so far is signs of asset quality concern for PSU Banks getting bottomed out. Markets are likely to trade firm where corrections will be bought into. We expect liquidity aided by return of FII's to keep markets firm. For Nifty, 8700-8640 is a strong support zone; chances being the index testing 8900 soon.

The writer is head, retail research, Motilal Oswal Securities Ltd