Where is Indian stock market headed?

Following sharp declines in European shares after Greece said international lenders have rejected its latest proposal to attract credit in a bid to come out of the mounting debt crisis which began to raise its ugly head years ago but is now poised to literally destabilise its economy with clear negative ramifications for the entire Eurozone, India watchers wonder how discouraging cues from Europe and rest of Asia too would affect the domestic equity markets. With the BSE index taking cues from palpable jittery across Europe (Greece has to repay 1.6 billion euros to the International Monetary Fund next Tuesday or be declared in default) and falling on Wednesday, snapping an eight-day winning streak (its longest advance in nearly five months), market players are keenly watching how the fallout of the two-day summit of European Union (EU) leaders beginning in Brussels on Thursday and resumption of talks between Greek Prime Minister Alexis Tsipras and creditors, are going to affect the Indian markets. This is in addition to the volatility witnessed by global markets in recent times triggered by many factors, which even includes the continued slowdown witnessed by China.

While addressing a conference at the Stockholm School of Economics on Wednesday, Reserve Bank of India (RBI) governor Raghuram Rajan said, the Indian economy will see through any impact of the Greece crisis. “One factor helping India is its stronger foreign exchange reserves,” he said. A sizable number of India watchers share Rajan’s perceptive and hopes the domestic market would once again prove resilient.

In fact, over the last week, the Indian stock market seemed to be on a comeback trail, posting 10 days of gains before European tremors played spoilsport.

The gains were supported by FMCG counters on hopes that improving monsoon will boost sales. Forecasts that monsoon is likely to make a comeback also cast a good spell over the overall market sentiment, raising expectations that the RBI will cut rates in October than in 2016, as anticipated earlier after it delivered three cuts of 25 basis points each in 2015 so far. This perceptive was also supported by subdued levels of inflation which has been falling since November last year. Exporters also began to rise after reasonably good US data and encouraging comments from Federal Reserve Governor Jerome Powell, who said that the Fed is prepared to raise interest rates twice this year.

In fact, in the recent past, India’s stock markets have been fairly resilient in the midst of all the gloom in other Asian emerging markets—it is the only market which posted positive returns in dollar terms since January this year. Though returns of 0.06% seems minuscule that should be seen against the fact that MSCI indices for most other Asian markets fell in June.

Continued inflows from domestic institutional investors have been one reason that contributed to the momentum. Over the past two months, while FIIs sold equities worth close to Rs 15,000 crore, domestic institutions bought stocks worth Rs 26,700 crore.

Some market players also see a 28% growth in the central government’s spending in April and growth in indirect tax collections in April and May as positivesigns.

However, according to the more pragmatic ones, whether flows from domestic institutions can sustain the rich valuations of Indian stocks remains a key question.

In addition, uncertainty over the government’s stance on tax issues continues to haunt investors. The recent move by the government to send demand notices to foreign institutional investors (FII) levying the minimum alternate tax (MAT) with a retrospective effect fanned the worst fears that India is yet to wake up from its crude, conventional approach when it comes to shore up tax revenue.

Besides, the government’s recent decision to review the Land Acquisition Bill and the Good and Services Tax (GST) Amendment stirred concerns that the implementation of Narendra Modi’s much-acclaimed reforms may run into rough weather. Analysts say that without making remarkable headway in terms of pushing structural reforms—which FIIs have been expecting and that are necessary for the sustained, long-term health of the domestic markets—the government’s commitment to the reforms agenda will remain questionable.

While improving corporate performance is welcomed by market players, better earnings in June quarter and the ones which follow will be crucial for sustaining the positivity that erupted over the last couple of weeks.
(Image: The Economic Times)