How will the market trend post Diwali?

The overheated market is showing signs of correction as Nifty slipped below 18,000 as of October 29, 2021. Market participants are not surprised though as it has been anticipated for a while now. The correction phase is largely going to expand even post-Diwali as emerging macro challenges are posing a few serious threats to the market.

Emerging challenges

The RBI’s announcement of its first VRRR auction is the first major threat to the rally. It is going to conduct its first 28-day variable rate reverse repo auction on November 2, 2021, for Rs 50,000 crore since it was first announced during the MPC meeting in September. With this, the threat of an impending liquidity squeeze has started taking a prominent shape.

RBI has clearly signaled the shift in its liquidity management strategy. Though the liquidity squeeze is largely going to be gradual and RBI’s policy stance remains highly accommodative, its impact on an already overvalued market cannot be undermined.

Secondly, inflated commodity prices continue to cast their shadow on Q2 earnings. It has forced the companies to take price hikes across the board to protect their profitability. Companies have also indicated further price hikes in coming quarters if commodity prices continue to stay elevated. It can potentially slump the rising demand and threaten the economic recovery that is currently underway.

Buyer’s market?

The market is expected to stay under stress and head for a meaningful correction post-Diwali, with liquidity squeeze proving to be the single most crucial factor.

However, it hardly affects the fundamentals of India as the market remains in a structural bull run. Several market-friendly reforms keep the economy in a good state. Post Air India’s privatization, expectations about privatization of other companies like BPCL, BEML and LIC have also gathered momentum. India’s industrial production has been impressive with IIP growing in double digits since February 2021. Exports are clocking the highest ever growth rates due to the rise in global demand.

Besides that, the Indian economy continues to post a strong trend of recovery post the second COVID-19 wave. Several international agencies are showing confidence in the India story. The International Monetary Fund has backed India to reclaim its tag of the fastest growing economy in the world. IMF expects India to clock a growth rate of 9.5% in FY22 and 8.5% in FY23 in its latest report.

India’s sovereign credit rating outlook was recently changed from negative to stable by global rating agency Moody’s. Because the banks have emerged mostly undamaged from the pandemic, Moody’s has decreased its assessment of the financial system’s diminishing downside risks.

The way forward

The government has shown a strong pro-business mindset with several initiatives like the formation of a bad bank, launching of PLI schemes, reforms in the telecom sector and farm laws. With such measures, the market is expected to stay resilient. And, as India pushes towards a USD 5 trillion economy, any correction from current levels will provide a great buying opportunity for investors.

(The writer is the Chief Investment Officer of Teji Mandi, Views expressed are personal)