Nifty, Sensex may rally if today’s low holds – Tuesday closing report

We had mentioned in Monday’s closing report that global markets were continuing to pressure Nifty, Sensex. The major indices of the Indian stock markets rallied on Tuesday and closed with gains over Monday’s close. On the NSE, there were 897 advances, 875 declines and 329 unchanged. The trends of the major indices in the course of Tuesday’s trading are given in the table below:

 

 
Indian equity benchmarks halted their nine-day losing streak, led by the gains in Reliance Industries Ltd. and ITC Ltd. The S&P BSE Sensex closed 227 points or 0.6% higher at 37,318.53 and the NSE Nifty 50 ended at 11,222.05, up 0.66%. The 50-share index halted its longest losing streak in over eight years. The broader market index represented by the NSE Nifty 500 Index closed 0.57% higher.
 
The market breadth was tilted in favour of buyers. About 897 stocks advanced and 875 shares declined on National Stock Exchange. Ten out of 11 sectoral gauges compiled by NSE ended higher, led by the NSE Nifty PSU Bank Index’s 2.85% advance. On the flipside, the NSE Nifty IT Index was the only sectoral loser, down 1.2%.
 
India's annual rate of inflation based on wholesale prices eased to 3.07% in April from 3.18% in March, official data showed here on Tuesday.
 
Grounded Jet Airways continues to lose its senior executives dashing hopes of the airline's revival. The latest to quit the company is its Chief Financial Officer (CFO) and Deputy Chief Executive (CEO) Amit Agarwal. The exit comes days after the airline's top executive Gaurang Shetty, considered close to founder Naresh Goyal, resigned from the board of directors. In a regulatory filing, Jet Airways on Tuesday said that Amit Agarwal had resigned from the services of the company with effect from May 13, 2019 due to personal reasons. Run out of cash, Jet Airways suspended its operations on April 17. Subsequent to this, hundreds of employees have left the carrier to join rival companies. Its aircraft are also being gradually de-registered. These events have added to the growing uncertainty about airline's revival. Lenders of Jet Airways led by SBI are currently in the process of selling the airline to recover their dues of over Rs8,400 crore. Private equity firm TPG Capital, Indigo Partners, National Investment and Infrastructure Fund (NIIF) and Etihad Airways had been shortlisted to submit their bids after they gave their EoIs. On May 10 -- the last date for submitting the binding bids -- only Etihad gave its offer and that too in the eleventh hour. The other two bids for the airline were unsolicited. Faced with salary delays and uncertainty over revival of the airline, thousand of Jet Airways employees, especially pilots and engineers, have left the company to join rival carriers. Jet Airways India shares closed at Rs128.90, down 7.33% on the NSE.
 
Aurobindo Pharma on Tuesday informed stock exchanges that the company, as well as other firms in the US generic drug industry, are facing a second lawsuit for violation of antitrust laws. This lawsuit, filed on May 10, was the second after the one filed in December 2016. "US states filed a second lawsuit in Federal Court similarly alleging that Aurobindo and other companies in the US generic drug industry had violated antitrust laws by fixing prices and allocating customers (the 'Second State AG Action')," Aurobindo Pharma said in a regulatory filing. 
 
The company said the "Second State AG Action" includes additional parties and additional products which were not referenced in the "First State AG Action". In December 2016, the Attorney General (AG) of the State of Connecticut along with the Attorneys' General of various other US states filed a lawsuit in Federal Court alleging that Aurobindo and other companies in the US generic drug industry had violated antitrust laws by fixing prices and allocating customers - the "First State AG Action". "On 18 June 2018, an amended complaint was filed in the First State AG Action. Aurobindo has denied all the relevant accusations in the First State AG Action and is vigorously defending against the matter," the company said. 
 
The statement said the company is reviewing the "Second State AG Action and expect that we will be filing papers with the Federal Court in due course denying each of the relevant accusations." Aurobindo does not, at this juncture, anticipate that these matters will have a material impact on the operations or business results, it added. Aurobindo Pharma shares closed at Rs713.50, down 0.52% on the NSE.
 
State-run United Bank of India (UBI) said it has posted a net profit of Rs95.18 crore in the fourth quarter of the financial year 2018-19 (FY19), after seven quarters of consecutive losses. The lender had reported a net loss of Rs260.62 crore in the March quarter of the fiscal year 2017-18 (FY18). United Bank of India shares closed at Rs10.85, up 2.36% on the NSE.
 
The top gainers and top losers of the major indices are given in the table below:
 
 
The closing values of the major Asian indices are given in the table below:
 
 

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Market Musings on Liquidity Flow
It has been over a decade since the world experienced the worst ever financial crisis leading to a global recession. The crisis led to untold misery, with people losing their jobs and livelihood, besides experiencing significant decline in wealth.
 
Governments responded in ways best known to them, based on what the experts suggested and what was politically feasible and attractive. 
 
A crisis of comparable magnitude had earlier taken place in the 1930s. Quite obviously, the policy measures adopted differed significantly during the two crises.
 
Learnings of the past seven decades were effectively used to fight the latest crisis, and new policy measures, as yet unknown and untried, were deployed. 
 
As always, when economists are involved, unanimity of views is a virtual impossibility.
 
Whether such policy measures were effective, and whether alternative actions could have had greater impact, will always be open to debate. 
 
What is indisputable is that when a crisis strikes, especially of such a magnitude, liquidity is critical. The Reserve Bank of India (RBI) left no stone unturned in injecting liquidity into the system, ensuring that the crisis was averted as quickly as possible. Interest rates were reduced, coming close to zero percent in many countries, at times even flirting in the negative zone. 
 
The injection of liquidity, of course, did not remain a short-term affair and various central banks have established programmes that lead to continuous infusion of funds in the market. Terms such as quantitative easing, tapering, and inflation targeting have now become an integral part of the market’s lexicon.
 
Why is continued monetary easing essential? Apart from inadequate regulation, high level of debt was the primary cause of the financial crisis and, in fact, of its severity. From 1950 to 2007, private sector debt (household and corporate) as a proportion of gross domestic product (GDP) increased to 170% from 50% in advanced economies. 
 
The subsequent drawdown of debt-stifled demand, which would have resulted in a far more serious recession but for the various measures undertaken to boost demand. These measures included fiscal expansion and monetary easing.
 
Fiscal expansion has its limits and eventually, had to be halted, with monetary policy taking up its customary expansionary function of boosting the economy.
 
It was widely believed that monetary easing cannot continue indefinitely and will need to be reversed sooner rather than later. The US Federal Reserve, in fact, started raising interest rates from December 2015 when growth picked up in the country, but had to quickly retrace. A decade after the crisis, monetary policy continues to be expansionary, with no sign of a reversal. 
 
The 10-year real interest rate in the US, currently at 1%, indicates that any increase in rate is practically ruled out for the next decade. That holds true for Japan, Europe and other economies too. Historically, low rates, close to 0%, have never persisted for such a long period. Two decades of virtual uninterrupted monetary expansion is unheard of. Being uncharted territory, its implications are unclear to anyone, including the central banks.
 
What are the repercussions for the Indian equity markets? In the long run, market movements are determined by economic growth rate, in particular the corporate sector earnings and the overall liquidity in the economy. I am not optimistic about growth rate of the Indian economy in the coming years and believe it will go down further.  (Read: Here is why Private Investment is Down). 
 
At the same time, global liquidity will find its way into the Indian economy and its markets. India is likely to be one of the largest beneficiaries of any money that flows to emerging markets. The interplay of the liberal liquidity conditions and plummeting growth will be interesting to watch and will determine the course of the Indian equities in the years to come. 
 
The situation is fairly novel since we have never experienced prolonged liberal liquidity, as we expect to do now. We may indulge in crystal gazing to predict its impact but we are in uncharted territory. Economic forces rarely work unidirectionally. While we may project a positive impact on equity prices, it could also have pernicious unintended consequences, as yet unknown to us. Hopefully, the regulators and governments will display sagacity and acumen to counter any negativity emerging from high liquidity, especially in conjunction with low growth.
 
One thing is quite certain. Given the low growth rate of the economy, any time there is an apprehension of withdrawal of liquidity from the Indian markets, the adverse impact on equity prices is likely to be severe. One needs to be prepared for such brutal fall in stocks and be on alert for any impending squeeze on global funds. The fall could undo years of wealth creation in no time.
 
(Sunil Mahajan, a financial consultant and teacher, has over three decades experience in the corporate sector, consultancy and academics.)
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COMMENTS

mathew sabu

2 months ago

I am not a well qualified guy to comment here. But using the commonsense the world is not over. I see here as a opportunity or next leg of growth. Be it election,electric revolution,trade war etc. A new era will arise.

Ramesh Poapt

2 months ago

crack visible now. dow jones/nasdek nosedied today thanks to
trade war. indian kt will follow the suit(SGX) down 97
just now. indian mkt was over valued since long ignoring all negatives.
euphoria was bound to end. business media never showed the correct
picture. debt mkt is fragile. mf aum in bubble phase. i will be pleased
to loose if mkt goes down 25%. and mf assets reduces 25%.

SANDESH PAWAR

2 months ago

I would have really appreciated the article even more if this was written when everything was hunky-dory.
With the current situation in the market it just looks like more noise.
I am sorry I don’t want to be rude, it’s just the timing.
It is just too difficult to be greedy when others are fearful.

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