Q2 GDP numbers aggravate concerns on economy: How will the market react on Monday?

India's poor Q2 Gross Domestic Product (GDP) numbers have aggravated the concern about the country's macroeconomic environment.

At first glance, it appears that the market will react sharply to the poor set of numbers and there may be a prolonged bearish phase. However, market veterans think otherwise.

"The market is unlikely to be impacted by the weak GDP data since it is largely in-line with the anticipation. Fixed capital formation and domestic demand are expected to improve in the coming quarters while corporate earnings have bottomed," Vinod Nair, Head of Research at Geojit Financial Services, said.

"We are more concerned about the supreme valuation of large-caps which does not provide leeway for main indices to do well. The market may have to bear transitory pain in the short-term as focus gradually shifts to value stocks," Nair said.

India’s GDP grew 4.5 percent in July-September 2019, the lowest since the fourth quarter of 2012-13, confirming fears of a deepening slowdown in the economy as households are not spending enough to buoy demand and companies are not adding capacities or hiring more.

India is now staring at the real possibility of a sub-6 percent annual GDP growth in 2019-20, the first since 2012, amid a stuttering world economy and plunging sentiments at home.

Read more: GDP growth slows to 4.5% in Q2 FY20, worst in six years

Amar Ambani, Senior President and Head of Research – Institutional Equities, YES Securities also finds the GDP numbers in line with expectations.

"The GDP growth figure is as per our estimate for Q2 FY20. The stock market has been trending lower in the last couple of trading sessions, in anticipation of poor numbers. While there may be a mildly negative reaction on Monday, it will not change the medium-term trajectory for equities," Ambani said.

"For the fiscal year FY20, our real GDP forecast stands at 5.2 percent, with risks to further downside. After a 135 basis rate cut delivered by the RBI since February 2019, we expect the RBI to cut rates by an additional 25 bps in December, taking the repo rate to 4.90 percent. Going forward, we believe the fiscal policy will need to play a dominant role in supporting overall growth. The government may choose to mildly deviate from its fiscal deficit target for this year as well as next fiscal," Ambani added.

Shailendra Kumar, Chief Investment Officer at Narnolia Financial Advisors said that in an immediate sense, stock market would be more focussed on on-going Q3 FY20 numbers, as that would determine whether we will have some kind of V-shaped recovery for the economy or it would be U-shaped.

"If data for the month of November and indications for December remains poor than the market would be giving up some of the recent gains. Forthcoming RBI policy next week would also be very important to watch out," Kumar said.