Decoding the Indian markets - Bull or Bear?

Indian markets have shown a lot of volatility in recent times. The market rallied 15 percent (about 2,650 points) in 15 trading days between 28 August 2013 and 19 September 2013 on account of the fading threat of US military attack on Syria, steps announced by the new RBI chief Mr. Raghuram Rajan to address depreciation of the Rupee and liquidity constraints and also the dovish stance by Fed which postponed the anticipated QE taper and thus resulted in an increase in FII investment into Emerging Markets (EMs) like India. FIIs made Net Equity investments of Rs.11,138crs in September (till 19^th September 2013) as compared to a net outflow of Rs. 6200crs in August 2013.

However, markets lost nearly 400 points on 20 September 2013 on Mr. Rajan’s decision to hike repo rates by 25bps and the blood-bath continues. So where exactly is the market headed and what are the factors to watch out for?

Well to address this let us rewind a bit and look at the concerns the markets were facing pre- the rally – CAD issues, depreciating rupee, economic slowdown, inflation worries, debt burden for corporates, policy paralysis and low visibility on core- policies owing to the looming elections. The Rupee regained some of its lost luster from the historic lows of 68.80 per dollar reached on 28 August 2013, benefiting from Mr. Rajan’s measures (including enhanced limits for exporters to re-book cancelled forward exchange contracts and a swap window to swap foreign currency deposits,etc) and renewed interest in EMs owing to Fed postponing the taper. However, India’s other macro-economic concerns remain, the impact of which will play out in the upcoming corporate results session which is expected to be disastrous.

In view of all these factors, I believe that while the Fed taper postponement might lend support to Indian markets as capital gets reallocated to EMs, markets are still likely to remain highly volatile in the next few months owing to risks related to the impending taper, weak fundamentals, impending elections and lack of visibility on implementation of pro-growth policies.  Moreover, in addition to RBI policies, even Government support in the form of policy implementation will be a key factor for the up-turn of India’s economic and investment cycle. 

I believe, the markets are likely to move in an uptrend post elections since the new government, whichever be it, will be under a lot of pressure to deliver. It is likely that we will see the resurgence of the new investment cycle once we start seeing policy implementations aimed at structural changes in the country. However, until all these macro-factors play out, the markets are more likely to be a Trader’s market rather than an Investor’s. Also, there is a high possibility of markets correcting further if the Fed tapering occurs before we see any structural changes in the Indian economic/policy scenario. Till either of these happen, the market may continue to be a ‘Defensives’ and ‘Export oriented’ market in the near term as has been the case during historically weak periods and periods of a stronger dollar respectively. Additionally, there might be some interest in stocks which are 'Monsoon plays' in the near term owing to a good monsoon session. However, I believe that the core India-centric ‘Cyclicals’ will start gaining traction only after visible improvements in the economic and policy space.