Market Outlook by Vinod Nair – 22 November

The market has done well in the last one month, India Mcap increased by Rs 7lac cr to Rs 141 trillion as the broad market rallied from the low of 10000 Nifty50 on 26^th October. The two obvious factors which helped the market are the reduction in crude prices from $85 to $63.5 and appreciation in INR/USD to 71.3 from 75. Evidently, FIIs had turned positive on emerging market, India’s net inflow is at Rs 5,000cr in the month of Nov till date after the consequent selling in the last three months. FIIs have been on a selling mode given the elevated risk of an increase in global interest rates. US bond yield started to decline in the month of November before the FOMC meeting, the outcome of which was in-line with the expectation and no rate hike. The rate is likely to increase in Dec, but it is possible that the speed of rate hike may slowdown in the future, given the concerns of a recession in the world economy due to the trade war, higher interest rate and lower liquidity in the financial market.

A domestic factor which helped the market was the truce between the Indian Government and RBI. The government had sent letters under Section 7(1) of the RBI Act to RBI regarding Prompt Corrective Action (PCA), RBI Capital Reserve, Liquidity Management of NBFCs and ease of norms of SMEs loans. Section 7(1) of Reserve Bank of India Act gives powers to the government to issue directions to RBI. The government wants RBI to soften PCA guidelines in recognition of PSUBs NPAs, handover funds from RBI’s capital and provide liquidity to the government, actively fund and manage the liquidity crunch situation of NBFCs and relaxation in SME loans. This disagreement between RBI and Government piled up in the media and the autonomy of the RBI was being debated.

In this context, the government and RBI held a meeting on 19th November 2018. In the meeting, it is decided that an existing committee of RBI, will review the Prompt Corrective Action or PCA framework and will finalise. Additionally, the deadline to implement Basel III lending norms has extended to 31st March 2020 from 31st March 2019 which will expand the lending capacity of Indian banks by Rs 3.7 lakh crores. An appropriate amount of reserves to the government will be decided by the committee in due course. The board has not taken any decision on the liquidity issues of NBFCs and announced the issues will be discussed in the next meeting. The board has advised RBI to let banks recast SME loans up to Rs 25cr and a restructuring scheme for the same would be considered.

Another surprise was a positive end to the Q2FY19 results compared to the much-muted start to the season. The market was hoping for 15% growth in profit but the actual numbers at the middle of the season were around 5% to 7%, we were seeing a lot of downgrade in the forecast. But we ended the quarter with a 12% growth in PAT for Nifty50. The main reason has better results from sectors like Financial, Oil & Gas and Metals at the end of the season. Though the quality of earnings has been muted, it reduced the worry of a further downgrade in earnings and brought some stability in valuation, the one year forward P/E which had reduced from 18.5x to 16.5x in the last two months.