(Any opinions expressed here are those of the author and not of Thomson Reuters)
The passage of the goods and services tax (GST) bill in the Rajya Sabha was already factored in by markets, which explains the lack of stock movement after the landmark event.
We instead saw profit-booking before a late recovery due to a policy rate cut by the Bank of England and hopes of an RBI rate cut. The Nifty gained 0.5 percent for the week while the Sensex ended flat. FIIs were net buyers to the tune of $376 million.
GST is expected to simplify the tax structure, boost the economy, promote manufacturing and lead to fiscal consolidation.
The indirect tax reform is positive for sectors related to consumption like auto, FMCG, cement and consumer durables.
Logistics, auto ancillaries, capital goods and infra sectors are also expected to benefit in the long term.
However, the telecom and restaurant sectors may be negatively impacted due to a higher tax burden.
The government has managed to build a political consensus but uncertainty on the rate remains. It has to be seen how the government manages to meet popular expectation built around the proposed 18 percent tax rate.
Auto sales for July, considered a lean month for two-wheelers and passenger vehicles, were surprisingly strong with PVs driven by new launches. On the other hand, sales of commercial vehicles and three-wheelers were disappointing.
The steel sector remained in focus after the government extended the minimum import prices for steel products for a further two months as cheap overseas shipments continue to threaten the industry. The floor price was introduced in February - the first time the government had taken such a step in over 15 years.
On the macro front, growth of eight core industries comprising 38 percent of the weight of items included in the IIP increased 5.2 percent in June on a yearly basis, compared to 2.8 percent growth in May.
Nikkei India Manufacturing PMI continued to improve, rising to a four-month high of 51.8 in July. The Nikkei India Services PMI rose to 51.9 in July indicating a further improvement in overall business conditions across the sector.
On the global front, the Bank of England cut its benchmark interest rate by 25 bps to 0.25 pct and revived a government bond-buying programme. The Bank of Japan kept rates unchanged while it approved $130 billion in fiscal steps to boost growth and to prevent Brexit-induced uncertainties from hitting business and consumer confidence.
In the coming week, the government will announce data on industrial production for June on Friday. IIP had increased 1.2 percent in May. CPI data for July is also scheduled to be released on the same day. It stood at 5.77 percent in June.
The earnings season is on its last legs. Hindalco, Adani Ports, Hero MotoCorp, Cipla, Lupin, Mahindra & Mahindra, State Bank of India, Sun Pharma, Bank of Baroda, Bosch, Grasim and Idea Cellular will release their June quarter numbers in the coming week.
On Monday, Indian markets are initially expected to react to the upbeat U.S. employment data, which bolstered expectations of an acceleration in economic growth and raised the probability of a Fed rate hike this year.
The focus will then shift to the RBI’s monetary policy review on Tuesday, where the central bank is widely expected to keep the repo rate unchanged at 6.50 percent.
Markets will keenly listen to outgoing Governor Raghuram Rajan's commentary on the progress made by banks in reducing stressed loans.
The RBI has kept March 2017 as the deadline for banks to clean up their balance sheets. Bank stocks are likely to take cues from the RBI, so will the other rate sensitive sectors such as automobile and real estate.
Toeing Rajan’s inflation fighting policies, the government has set the inflation target at 4 percent. This along with a good progress of the monsoon and passage of the crucial GST bill has raised hopes of a 25 bps rate cut.
If the RBI does cut rates, which I feel is remotely possible, the Nifty may see a sharp rally towards 8,800 points.
With no other major domestic events on the horizon, markets may correct and consolidate at lower levels as valuations are getting stretched.
Though the best of the expectations are already factored in – a good monsoon and passage of the GST bill – we need to see them translated into improved corporate earnings.
The first signs of monsoon-related benefits may be seen in the December quarter results. Since that is a few months away, I would continue to advice profit booking and wait for a healthy correction before re-entering.
The views expressed in this article are not those of Reuters News.