Kotak AMC on key factors that will drive Indian stock markets
Domestic equity markets largely moved in a range and consolidated during the week ended 23rd July 2021. Globally, the trend of rise in COVID cases on account of the delta variant, especially in UK and Asia and inflation concerns are some of the key risks that the market is grappling with. However, data shows that while there has been a rise in the Covid cases globally, for countries with higher proportion of vaccinated population, the incidents of death and hospitalisation have so far been low.
In India, with the number of daily COVID cases coming down, we have seen easing of restrictions in many states. The pace of economic recovery and business resumption in the second wave has been sharper than in the first wave. Many of the high frequency economic indicators are now close to the pre COVID levels. Indicators such as e-way bill, auto and property registration, electricity consumption and card spends are all showing an uptrend after touching lows in month of May. The unemployment rate continues to decline which is another positive indicator for economic recovery. From here on, the key monitorable remains the pace of vaccinations which has plateaued recently largely due to supply side challenges. It is however expected that the pace of vaccinations would improve from August onwards. This would be key to prevent the occurrence of a third wave.
While FIIs flows turned net negative in July, Domestic Institutional Investors remained net buyers. SIP flows to mutual funds is also holding up well resulting in fairly balance institutional flows.
The Consumer price Index (CPI) inflation rose 6.3% YoY in Jun-21, flat MoM. CPI inflation is now above the RBI’s target range for the second consecutive month. On the other hand, IIP worsened MoM in May 21 due to regional lockdowns imposed by most states. With uncertainty around the pace of economic growth remaining, we expect that RBI would continue with their accommodative stance and keep key policy rates on hold for now.
The Q1FY22 corporate earnings season has started off well despite impact of the second COVID wave seen in months of April and May 2021. Management commentary in terms of recovery especially in H2FY22 would be the key to watch out for. Going forward, pace of vaccinations need to be monitored which is important to guard India from third COVID wave. Few other factors that will likely decide the market movement include (a) Progress of monsoon and sowing of Kharif crop for summer season (b) global liquidity and global interest rates and improvement in global GDP and ( c) the trend of inflation in many global commodities like crude oil and steel and (d) pace of corporate earnings growth in India.”
Shibani Kurian, Senior EVP & Head- Equity Research, Kotak Mahindra Asset Management Company
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