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Informist, Tuesday, Feb. 4, 2025

 

By Anjana Therese Antony 

 

MUMBAI – For the Indian equity market, which was dealing with expensive valuations and disappointing earnings for the second quarter in a row, the actual imposition of punitive tariffs by the US and the lower-than-expected capital expenditure budgeted by the Indian government come as a double whammy, one that will drag the market down the fifth month in a row, analysts said. The market is unlikely to shake off its 'underperformer' tag anytime soon despite a major cut in income tax rates. While market players are bullish about the long-term prospects of the economy, the near-term picture has turned gloomier than it was before the double blow. 

 

Though investors heaved a sigh of relief Tuesday as US President Donald Trump paused the imposition of tariffs on Canada and Mexico, market experts are keeping their fingers crossed. As the to-and-fro tariff attacks between the US and its key trading partners continue, market watchers worry that this could result in a spike in US inflation, which is most likely to slow down interest rate cuts in the world's largest economy. 

 

While the benchmark 50-stock Nifty 50 is widely expected to fall in February, the drop is expected to be milder than in previous months. Support for the Nifty 50 is seen at 23050 points, according to the median of the estimates of nine broking firms, which should be music to quite a few ears as the index had closed below the psychological 23000 level twice in January. The 50-stock index ended 1.6% higher at 23739.25 points on Tuesday, which is still down 10% from the record high it had scaled in September 2024. While Tuesday marked a sharp recovery in India's headline indices from the fall on Monday, the indices have performed poorer than most of their global peers. So far in 2025, the Nifty 50 and the Sensex have risen only around 0.4?ch, while their peers in the US, UK, Germany, Italy, Hong Kong, South Korea have risen 1-7%.

 

The rise of the dollar and the accompanying fall in other currencies is also a cause of concern. The Indian rupee hit a fresh record low and fell below the 87-per-dollar mark on Monday after Trump's tariff announcement, not to mention the non-stop selling pressure from foreign institutional investors, who have offloaded Indian shares worth INR 2.7 trillion since October. All of these, coupled with high valuations, are unlikely to bring FIIs back to India anytime soon, experts said, though the trend may reverse in the long term.

 

The focus is now turning to the latest favourite, the consumer goods sector, which was the focus of all attention after the finance minister announced the much-anticipated tax relief in the Union Budget for 2025-26 (Apr-Mar). This came as a bout of heavy rain in the parching summer for fast-moving consumer goods companies, which have been feeling the heat of weak demand in urban areas and only a gradual recovery on the rural front. Analysts said investors would and should shift their focus to companies that are heavily dependent on consumer spending, such as FMCG, automobile, and retail. 

 

On the higher side, derivatives analysts see the index rising to 24000 points, according to the median of estimates. This is up nearly 3% from Tuesday's closing level, but still 9?low the record high. IDBI Capital Markets & Securities has the highest resistance of 25000 points and the lowest support of 22300 points among the nine estimates, pointing to increased volatility over the next few weeks. 

 

The medium- to long-term growth of the market would be backed by better returns, earnings growth, and a pickup in economic growth. There is still some hope about earnings. Pankaj Pandey, head of research at ICICI Securities Ltd. said the first half of FY25 saw 5% growth and the second half is expected to give a better figure of 8%, leading to about 7% growth for the full year. "FY26 will be a lot better than this year. Whether we normalise to 14-15?rnings growth is to be seen," he said.  

 

TARIFF WARS

Volatility is the main concern for February, not so much the fall in the market. The US has paused the 25% tariff it has imposed on all goods imported from Canada--except crude oil--and Mexico for a month, but retained the 10% levy on China. In retaliation, Canada has imposed a 25% levy on goods from the US, which the market calls a "tariff pe tariff" (tariff on tariff). Joining the club, China also imposed a 15% tariff on coal and liquefied natural gas imports from the US and 10% on imports of crude oil, farm equipment, and a few types of cars.

 

Market watchers are anticipating more retaliatory measures from these countries, which may result in a full-blown trade war and lead to a spike in global crude oil prices in the near term. The next potential 'tremendous tariff maker', India, may also see a ripple effect. Though India was excluded from the first set of tariffs announced by the US on Friday, there are fears that it would soon be added to the list, the last thing the country would want amid its economic slowdown. In an attempt to avert damage from the US, in its Union Budget the Indian government announced import duty cuts for a range of US products, including fish feed inputs, motorbikes, and smartphone parts.

 

Some market participants say India cannot escape global tariff wars, at least in the near term. "We note that the tariff action was far more benign than originally threatened. Further downside risk would come from any direct action on India," Emkay Global Financial Services said in its strategy report on Monday. "Higher tariffs (by the US) raises worry that emerging markets' currencies may depreciate...if rupee goes to 89-90 (per dollar) level, FII outflows would continue," Sanjeev Hota, head of research at Sharekhan, said. On Tuesday, the rupee closed at 87.06 per dollar.

 

MPC SURPRISE? 

Apart from the pause in levies on Canada and Mexico, another sign of relief for equity investors is the increasing hope of a 25-basis-point cut in interest rates by the Reserve Bank of India this week, which will bring the benchmark RBI repo rate to 6.25%. If that happens, it will be the first reduction in rates in India in about five years. If the RBI does cut rates, this policy would be different from most other announcement days for the Indian market. Barring the RBI policy outcome in June 2024, the equity market has not seen any sharp gains or losses in the last two years on RBI policy announcement days. 

 

The only day when the equity markets have reacted on an RBI policy statement day was in June last year, but that was probably more due to the results of the General Elections than due to the RBI pronouncement, which held no surprise. The rate-cut optimism took shape after the government said it would continue fiscal consolidation in the next financial year as well. The Union Budget pegged the fiscal deficit for FY26 at 4.4% of GDP, and lowered the estimate for FY25 by 10 basis points to 4.8% of GDP. 

 

"Domestic growth and inflation dynamics warrant easing and will likely outweigh the concern of volatility stemming from external factors in the (RBI) policy on Feb. 7," Morgan Stanley said in a report. It expects the apex bank to provide support to ease liquidity conditions, regulatory burdens, and policy rates. The Monetary Policy Committee's three-day meeting will end on Friday. The committee has retained the 6.50% repo rate for 12 consecutive meetings since April 2023. This will be the first policy meeting for the new governor, Sanjay Malhotra, who took charge on Dec. 11. 

 

Following are the support and resistance levels for the Nifty 50 index for January, based on responses from nine brokerages:

 

Broking Firm	Support 1	Support 2	Resistance 1	Resistance 2
IDBI Capital Markets & Securities	22300	--	25000	--
HDFC Securities	22700	--	24200	--
Axis Securities	22800	22650	23650	23900
Sharekhan	23000	--	24000	--
StoxBox	23050	--	23800	--
Choice International	23100	23000	24000	24100
Emkay Global Financial Services	23100	22800	23600	24000
NVS Brokerage	23145	--	24000	--
Indiacharts	23200	22800	24200	24800
Median	23050		24000

 

End

 

With inputs from Team Informist

Edited by Avishek Dutta

 

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