Nifty likely to gyrate between 8100-8350 as demonetization impact stays unclear

Equities were the best performing asset class globally. US equities have been conquering new highs; this week being their fifth consecutive week of gains. European equities rallied hard as ECB continued with liquidity infusion in 2017, though tapering it a bit. Their monthly bond purchases will be reduced to € 60 billion from € 80 billion starting in April. Also, the ECB will be able to buy government bonds that are yielding less than its deposit rate, which now stands at minus 0.4%. By tapering its monthly asset purchases from € 80 billion down to € 60 billion, they are still looking to inject an extra € 540 billion in quantitative easing (QE).

To put this into perspective, this easily surpasses in equivalent terms the combined GDPs of Greece and Portugal. Back home, the Reserve Bank of India (RBI) kept lending rates unchanged and rightly so, as monetary policy framework post US monetary policy rollout in ensuing week is the need of the hour. The yield differential between India and USA has narrowed alarmingly making Indian treasury market unattractive for foreign players. Further, the Federal Open Market Committee (FOMC) is very likely to hike rates in the forthcoming policy.
 
In our markets, stability seems to be restoring back. Indices recovered post policy announcement in which RBI kept rates unchanged as Nifty rallied to close positive for the week with gains of 175 points (2.14%). Mid and small cap Indexes gained by 3% each while sector wise metals were clear outperformers gaining over 5%. Auto, media, realty and PSU banks gained 3-4%. Energy, FMCG, private banks gained 2-3% while pharmaceutical sector declined 1%.

On macro-economic front India’s Index of Industrial Production (IIP) declined 1.9% YoY in October 2016, as against growth of 0.7% in September and much lower than our expectation (and market consensus) of 1.1%. It implies that IIP fell 0.3% in the first seven months of FY17, marking the first decline (over corresponding period) on record in past 35 years. Despite the festive season, manufacturing activities contracted 2.4% YoY in October, and mining activities fell 1.1%. As per user-based classification, the capital goods sector declined more than 20% for the fourth consecutive month and marked 12th consecutive month of contraction. More interestingly, consumer non-durable goods declined 3% in October, marking the highest fall in six months. Although IIP in October was worse than expected, indirect tax mop up has been up 26.2% in April to November from a year ago period while net direct taxes increased 15.1% over this period. Nearly 60% of the budgeted target for total tax collection for FY17 has been received so far. Going by indirect tax collections in the month of November, the impact of demonetization on economy is not very clear.

In the ensuing week markets will closely watch the much awaited FOMC meet outcome and our consumer price inflation and wholesale price inflation numbers. The demonetized money has been flowing thick and fast into the banking system. The quicker it comes the faster economic activity will revert back to normalcy. We expect Nifty to gyrate in the broad range of 8100 to 8350, where corrections are lapped by value pickers.

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