US rate, domestic prices to set equity markets direction

Mumbai: The global hysteria over a likely interest rate hike in the US, macro-economic inflation data and the political logjam in Parliament after demonetisation are expected to set the tone of the Indian equity markets during the upcoming week.

Besides, other major themes for the trade week starting December 12 will be the central government`s efforts to end the stalemate on the contours of the Goods and Services Tax (GST) framework and the uncertain foreign fund inflows` situation.

"Global central banks` announcements will take centre-stage next week. While FOMC (Federal Open Market Committee) is widely tipped to raise rates, indications towards the pace of further tightening will be closely followed," Anand James, Chief Market Strategist, Geojit BNP Paribas Financial Services, told IANS.

The US Federal Reserve FOMC`s rate setting meeting is slated to be held on Wednesday, when it is widely expected to announce a 25 basis points (BPS) interest rate hike.

A hike can potentially lead foreign portfolio investors (FPI) away from emerging markets such as India, and dent the business margins of corporate sector, as access to capital from the US will become more expensive.

According to Dipen Shah, Senior Vice President, PCG Research at Kotak Securities, the equity markets have taken in their stride the disappointment over the Reserve Bank of India (RBI) decision to maintain key interest rates and the Italian referendum.

"The important trigger next week will be the decision by the US Fed on interest rates. Markets have already factored in a 25 bps rise in rates," Shah said.

"The accompanying commentary will be closely watched for indications on future trajectory on rates. A dovish tone will be positive for global emerging markets."

Even the Indian rupee is expected to remain under pressure in the coming week due to heightened chances of a US rate hike and the upcoming domestic macro-economic inflation data.

"Over the near term, we expect the Indian rupee to reach its near term peak between 66.90/67.20 levels on spot against the US dollar," Anindya Banerjee, Associate Vice President for Currency Derivatives with Kotak Securities, told IANS.

"Post the US Fed announcement, the Indian rupee may gradually depreciate towards 68.00 levels on spot."

Apart from the US Fed`s decision, investors will focus on the domestic macro-economic inflation data.

"Inflation data will be closely followed in the backdrop of IIP (Index of Industrial Production) already showing a sharp fall," James pointed out.

India`s Central Statistics Office (CSO) is expected to release the macro inflation data points -- Consumer Price Index (CPI) -- for November on Tuesday.

The CPI will be followed by the release of Wholesale Price Index (WPI) by the Ministry of Commerce and Industry on Wednesday.

"A soft CPI figure could improve chances of a rate cut in the (RBI`s) February meeting," James said.

In addition, the GST Council meet next week will keep the equity markets on tenterhooks over a possible delay in the pan-India indirect tax.

"GST meet is also scheduled early next week and emergent consensus would be considered crucial for speeding up the recovery process post demonetisation," James said.

According to Dhruv Desai, Director and Chief Operating Officer of Tradebulls: "Indian equity markets are likely to be volatile due to profit booking and selling pressure at higher levels."

"Stock specific price movement can be seen in the equity markets next week."

Desai elaborated that the pace of inflow of funds from the FIIs` (foreign institutional investors) will be a crucial determining factor for the movement of key indices.

In terms of investments, provisional figures from the stock exchanges showed the week witnessed a healthy inflow of foreign funds worth Rs 936.99 crore.

Last week, Indian equities markets rose as investors` sentiments were boosted by positive global cues, rupee`s appreciation and fresh inflows of foreign funds.

The key Indian indices closed the trading week with gains of around two per cent each, as European Central Bank (ECB) decided to extend its asset purchase programme. Short covering by domestic investors, too, supported the upward trajectory.

The barometer 30-scrip sensitive index (Sensex) of the BSE surged by 516.52 points or 1.97 percent to 26,747.18 points.

The wider 51-scrip Nifty of the National Stock Exchange (NSE) gained 174.95 points or 2.16 percent to 8,261.75 points.