As the first phase of the Gujarat election started on 9th Dec, with some positive vibes from the survey results, market inched by 3% from the recent low (wow basis). Before that market had slid by around 4% over risk like fiscal deficit & crude prices in spite of repeated statement of FM that fiscal is under control. Sentimentally this correction may be largely on account of anticipated risk over Gujarat election outcome. Volatility will prevail till the final standpoint depending on the extension or contraction of the central ruling party’s political ecstasy in Gujarat. The sentimental waves to this state election emerged from the first poll after the transformative reforms like Demonetisation & GST. Gujarat being a home ground to BJP and having impacted heavily from these dual reforms to business and trading community, it is supposed to provide a subjective & objective picture of the common society and BJP’s stand in the house. In the end it will provide an impression to the market-vision that BJP will maintain or expand its strong hold in the political era which will extend beyond the battle for 2019 election.
RBI monetary policy was on 6th Dec, market was a mild cautious ahead the policy. As the event matured in-line with expectation, we had a relief rally as tandem moved to the global market. The hawkish stance remained which can impact the trend of the market over the medium-term as fiscal consolidation and inflation may inch higher. A contemplating factor is that in the near-term a large portion of this risk is factored in the bond market hence immediate rollback is ruled out. Today’s FED meeting will have an impact on the RBI policy plan for next year. US FED rate is expected to be increased by 25bps now and may be hiked three more times next year. This will be led by an improvement in the US & global market, economy, inflation and need for more interest rate on debt funds. As a result RBI’s bandwidth to cut India’s interest rate will reduce, and we are likely to shift from an interest rate cut scenario to a flattish or hawkish market. This can impact the flourish movement of the equity market to moderate next year. However, RBI reiterated an economic growth of 6.7% for FY18 and real interest rate in India is at good level compared to other EMs.
Post the weekly up move, some profit booking was seen ahead the final result and rise in oil price and its cast over the inflation trajectory. Rate sensitive stocks underperformed ahead the economic data like CPI inflation & IIP. November CPI was expected to inch up to 4.2%, while actual was way beyond at 4.88% led by food & fuel prices, which is more than the upper end of the RBI forecast range of 4.3 – 4.7. Drop in IIP to 2.2% in October even after GST led restocking is indicating some sluggishness in industrial growth. Including the impact from the Gujarat Election, market will also look towards the global market and the implication to the INR like US tax reform and FED rate hike plan.