Nifty snaps 7-day winning streak; here's why strong Q1 GDP print fail to cheer the market

Benchmark equity index the Nifty ended in the red on September 1 after seven consecutive sessions of gains, mostly due to profit-booking even as India's Q1 gross domestic product (GDP) number showed the country remained among the fastest-growing major economies in the world.

The Nifty ended 56 points, or 0.33 percent, lower at 17,076.25, a day after India reported a 20.1 percent year-on-year jump in real GDP in the April-June quarter.

This record quarterly print was primarily the result of a low base last year. GDP contracted 24.4 percent in Q1FY21 as the outbreak of the coronavirus pandemic triggered an India-wide lockdown that brought economic activity to a halt.

The GDP print was largely in line with expectations and fetched positive reviews from analysts and brokerages.

"With 20.1 percent growth, India becomes the fastest-growing major economy of the world, a position the country is expected to maintain in FY22 and FY23," brokerage firm Anand Rathi Share and Stock Brokers said.

“Investment, particularly the construction part, has been the major driver. Foreign demand also helped. Consumption and services showed relative weaknesses.”

Global financial services firm Credit Suisse said the Q1 GDP print was in line with consensus. It said that most high-frequency indicators had been strong in second quarter, so far, and the Q2 GDP could be 6 percent higher than the FY20 average, implying a 15 percent year-on-year growth.

"We continue to expect a 5 percentage point upgrade to consensus FY23 GDP forecasts," Credit Suisse said.

What weighed on sentiment?

Indian market benchmarks the Sensex and the Nifty opened higher and hit their fresh record highs of 57,918.71 and 17,225.75, respectively, in intraday trade.

However, they failed to hold altitude and fell prey to profit-booking. It appeared the strong Q1 GDP print failed to underpin sentiment.

One reason could be that the market had factored in a strong GDP print.

"The market has factored in the positive news and some profit-booking with a positive bias was expected. A fiscal deficit at 20 percent of the annual target has further triggered a positive mood in markets. We feel this could probably be one of the best years for the Indian economy, given the government efforts of disinvestment are in sight and on track," said Keval Bhanushali CEO at Marwadi Shares and Finance.

Another reason the GDP numbers were strong was the low base and not strong enough to boost the economy which is hit hard by the pandemic.

"While the numbers should be read with optimism given the global comparables, we must also account for the low-base effect behind these. In absolute terms, the GVA (gross value added) and GDP growth numbers
are closer to the 2017-18 numbers," Utkarsh Sinha, Managing Director, Bexley Advisors.

However, one must view this with optimism despite the low-base effect though.

The effect of the pandemic could have been a lot worse, as it has been for many global economies from an output growth perspective. “The fact that we are north of 20 percent is indicative of a larger recovery in the longer term,” Sinha said.

Long-term investors should read this as a positive, signaling a positive macro outlook. Certain investors who had higher forecast expectations for the quarter might be disappointed but it is unlikely
to have a negative impact on values in the short term, Sinha said.

The profit-booking seen the market during the day may be understood as a result of two things—one, a positive number was already factored in and second, the market perhaps could not find clear signs of a robust economic rebound.

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