RBI policy, macro data – factors driving markets this week

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Market last week

Market continued to consolidate this week as factors like heightened volatility in money markets, INR depreciation, increased bond yields and FIIs outflows from emerging markets. On August 27th commercial paper issued by subsidiary of IL&FS Financial Services were defaulted. Equity markets held the bias for about 1month before the sharp fall which started on 21st Sept. This turmoil was triggered when the quality of debt held by MFs started reducing and redemption pressure was initiated by corporate investors. The default and subsequent downgrade in its credit rating led to panic sell-off in Banking & NBFC space. This sell-off was extended to other sectors as well. Markets were concerned about the near-term headwinds like quality & increased cost of funds along with tighter liquidity situations. The worse hit was Auto which declined by 8% followed by Metals 5% and PSU Banks by 5%. Mid & Small cap lost 5% & 8.5% respectively.

On the other hand, cancellation of trade talks between US and China, and rise in oil price as major OPEC producers declined to increase the output demoralized investors in domestic markets. FED’s 25bps rate hike, outflow of foreign funds and F&O expiry heightened the volatility in the market.

Week ahead

Investors are yet to gain confidence to start bottom fishing due to lack of liquidity, margin funding and short selling in the market. Weak sentiment is likely to extend till the financial market stabilizes and confidence reverts with accommodative valuation. RBI policy meet next week is the key event; market is pricing a 25bps rate hike.

Posted: October 2018

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