Rate cut, election results to dictate market trend

Global markets gained ground on Thursday, with the benchmark indices rallying about one per cent in intra-day deals, after the US Federal Reserve kept key rates unchanged and brought down the anticipated hikes in 2016 to two from its December 2015 forecast of four.

Profit-booking at higher levels, however, saw the rally fizzle out by the end of day with the S&P BSE Sensex and the Nifty 50 indices settling almost flat at 24,677 and 7,512, respectively.

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So, what do the next few months hold in store for the equity markets?

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Given that the US Fed has kept rates steady and cut its forecast for the number of rate hikes to two in the calendar year, and a cool-off in inflation back home, analysts expect the markets, over the next few months, to be guided by a possible rate cut by the Reserve Bank of India (RBI) and the March quarter corporate earnings. The outcome of the assembly polls, to be held in April and May, could also boost sentiment, they say.

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“Emerging markets, including India, should rejoice as fears of massive exodus of foreign capital should abate with a more modest increase in the US rate trajectory expected over the medium-term. RBI should breathe easy as pressure on the rupee should abate and it can continue on its path of monetary accommodation without worrying about imported inflation. Likelihood of a comeback of risk-on trade should lead to bounce in equities,” says Ajay Bodke, chief executive officer and chief portfolio manager (PMS) at Prabhudas Lilladher.

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“The up move would be supplemented by a productive first half of legislative business with many crucial economic Bills being passed by Parliament. It rekindles hope of passage of other pending Bills like the bankruptcy Bill, amendments to the Mines and Minerals (Development and Regulation) Act and even GST,” he adds.

With four states and one Union Territory (Tamil Nadu, Kerala, Puducherry, Assam and West Bengal) scheduled to go to the polls in April-May, analysts at Nomura suggest that though a majority for the NDA ruling in these states is highly unlikely, any improvement in the BJP’s performance in these states, along with the other state seats coming up for re-election, would improve the party’s tally.

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“We estimate the NDA’s overall seat tally could rise to around 80 by end-2016 from 64 at end-2015. Hence, passage of legislative Bills could become slightly easier as the year progresses,” says Sonal Varma, executive director and India Economist at Nomura, in a co-authored report with Neha Saraf. Tirthankar Patnaik, India Strategist at Japan-based Mizuho Bank, however, feels that after cutting rates by 25 basis points (bps) in the next policy review scheduled for April 5, RBI might be on a prolonged pause mode, unless oil prices drop substantially.

He expects the March quarter results to be below par, but says the markets have already begun aligning themselves to this fact.

Bodke, on the other hand, expects the Nifty to move up to 7,800–7,900 levels, with interest rate sensitives leading the charge, along with selective consumption-focused plays in the fast moving consumer goods (FMCG) segment.

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