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Informist, Wednesday, Aug 14, 2024

By Anjali Singh

MUMBAI – The direction Indian shares will take Friday will depend on how the US inflation data comes out later today, analysts said. The holiday for Independence Day on Thursday will give domestic investors a day to absorb the US inflation data as well as take cues from the way the US market reacts to it today and Thursday. While a low US inflation print is expected to spur some more buying in the local market, the extent of this buying is not yet clear. Any euphoria over low US inflation data is also likely to be tempered by the overhang of lower-than-expected corporate earnings growth in the Apr-Jun quarter and a few sector-specific drivers.

Technology stocks are likely to benefit the most if it turns out that US inflation has fallen further. Metal and mining stocks, on the other hand, are likely to continue to fall due to the Supreme Court order today that states can levy tax on the mining of minerals and metals with a retrospective effect all the way back to 2005. The only saving grace in that verdict for these companies was that the court specifically said that states cannot levy penalties and interest on tax claims for past periods.

Information technology stocks are expected to benefit from any rate cuts by the US Fed as over 40% of the total revenue of these companies comes from the US and a cut in rates is expected to spur demand from the banking, financial services, and insurance sectors. Technology stocks are expected to gain in the upcoming week and the Nifty IT may reach the 40800 level, Brijesh Ail, head of technical and derivatives at IDBI Capital Markets & Securities, said. The index outperformed the headline indices today and closed 1.6% higher at 39731.25 points.

US consumer price inflation is expected to rise only 0.2% in July, its lowest in months. If that happens, the US Fed is widely expected to start cutting benchmark interest rates from its next meeting in September. Analysts are, however, divided on how much of a cut the Fed will effect in September. As per the CME FedWatch Tool, there is a 54.5% probability of a 50 basis points rate cut in the September meeting and the probability of a 25 bps rate cut is 45.5%. As per a report by Nomura Global Market Research, the US Fed may trim interest rates three times this year with consecutive 25 bps cuts in September, November, and December each.

"Growth momentum is moderating across cyclical sectors," Nomura said. "Labour markets are cooling, and survey data point to pockets of stress for household balance sheets." Further, it said the probability of a 50 bps rate cut could rise if acute signs of stress in the labour market emerge. The market will await the US weekly employment data, due Thursday, for more cues on the labour market. 

The US Fed will not take a rate cut decision in a hurry, Jayesh Mehta, director at Mehta Vakil & Co, said, talking about the 75 bps rate cut expected by Nomura. The Fed may cut 25 bps in September and will review the situation because the outcome of the US elections will also have a bearing on the rate cuts. Mehta expects a 50 bps rate cut only if the concerns worsen in the US. Further, a 25 bps rate cut is factored in by the market, Mehta said. Saral Seth, vice president of institutional equities at Indsec Securities, has a similar view and expects the Fed to stagger the rate cut. He believes a 75 bps rate cut is likely in the rest of this calendar year as inflation in the US is under control.

The Nomura report also expects similar rate cuts from the Reserve Bank of India in 2024-25 (Apr-Mar), starting October. "Growth and inflation have been softening, but India remains in a macro sweet spot," the brokerage said. While the GDP growth in India is still robust, it moderated to 7.8% in Apr-Jun from 8.4% in Jan-Mar, Nomura said. "Data for (Jul-Sep) and early data for (Oct-Dec) suggest some softening of the growth momentum, evidenced in urban consumption indicators like passenger car and (medium and heavy commercial vehicle) sales, reports of weaker corporate results and moderating export and core import growth," it said. A cut of 25 bps can be expected in the next monetary policy meeting, but the commentary from the RBI will be watched, Seth of Indsec said.

As the quarterly earnings wrap up today, analysts recall the earnings for the June quarter as muted and lacklustre. "Earnings this quarter were soft. The net profit of Nifty 50 companies rose only 4-5% on average," Seth said. The market is also largely subdued because of the lacklustre earnings, analysts said. However, the optimism and strong inflows by the domestic players is helping the market. This is despite foreign institutional investors selling the equity market. So far this month, FII have net sold equities worth 188.24 bln rupees.

On the sectoral front, metal stocks are expected to fall further. Of these, Steel Authority of India and NMDC are likely to be affected the most, with potential dues estimated at 46 bln rupees and 62 bln rupees, respectively, Vikram Kasat, head-advisory, PL Capital said in a note. "This ruling could also impact cement companies and may contribute to rising inflation, which in turn could delay potential rate cuts," Kasat said. The Nifty Metal index closed 1.3% lower at 8844.30 points today.

The Nifty 50 closed 4.75 points higher at 24143.75 points and the Sensex closed 149.85 points or 0.2% higher at 79105.88 points. Going forward, the 50-stock index is expected to find support at 23500 points and face resistance at 24200 points.  End

Edited by Ashish Shirke

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