FIIs inflows may be the key important factor this month, market may be volatile and move as per the outcome of the developments, short-term impact.
The market is concerned about the RBI Monetary Policy Committee's (MPC) decision to maintain interest rate cuts. But we feel the decision, which was unanimous, is well thought out to provide ample time for the transmission of the five consecutive rate cuts undertaken since January 2019.
With the economic slowdown getting more severe than expected and the RBI cutting real GDP forecast for FY20 to 5 percent from earlier 6.1 percent, we can expect more rate cuts in the upcoming MPC meetings as the RBI has also maintained its accommodative stance.
RBI is taking a pause to oversee the benefits to the economy of the last set of measures undertaken. High food inflation and tepid pace in transmission of previous rate cuts prompted the central bank's decision for the time being.
RBI noticed some green shoots in the economy from agriculture and exports and foresees more supportive measures from the government. We should not expect this decision to completely change market trends, rather expect consolidation in rate-sensitive stocks in the short-term.
The biggest losers will be sectors such as Finance, Auto and Metals, which were performing well in the past two months. Such stocks will now focus more on economic data and revival in business growth, this consolidation can be a good opportunity to invest for long-term gains.
More than this, please note that the month of December has been very volatile. It depends a lot on the inflows of foreign institutional investors (FIIs) in India, which in turn depends on the tendency of the global markets and the risk-on mode of foreign investors to invest in emerging economies.
December is thanksgiving season in the western part of the world with long holidays, which generally impacts the strength of the inflows. In the past five years, the Nifty was +3 percent to -3.6 percent, marginally negative with an average of -0.2 percent while Nifty Midcap was +6 percent to -4 percent, mild positivity of +1.5 percent.
In the past three years, the US Fed policy meeting, which is usually held during the second week of December, used to attract attention since it defined the trend for the global interest rate for next year.
Lower interest rate is and was a need of the global financial market which is slowing down. This time the market expects a dovish view with no hike in rates and to maintain the stance in CY20.
This time we have to handle two key global events which will control global markets' trend, namely the US-China trade deal and Brexit (UK election on December 12). The market is expecting the first phase deal between the USA and China to be signed in December.
This week, the global market turned cautious due to a negative tweet by US President Donald Trump that he is not in a rush to finalise a deal with China. There were also vibes that China may retaliate over US's support to Hong Kong, impacting the progressing trade deal.
The US also imposed import tariffs on Argentina and Brazil due to accusation of a continuous devaluation of their currencies to USD.
FIIs inflows may be the key important factor this month, the market may be volatile and move as per the outcome of the developments, short-term impact. But we should also consider the inflows of mutual funds (MFs) which has become a very powerful player in the past three years.
MFs have invested an average net inflow of Rs 7,000 crore in December, led by financial investment in equity versus physical investment. In addition, it is very vocal domestically that the economy is at its worst and corporate earnings have bottomed out which will invite other players like banks, insurance, proprietary and high net worth individuals (HNIs) to invest more.
The author is Head of Research at Geojit Financial ServicesDisclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.