Market is showing exhaustion; however, much will depend on monetary policy

The market was in a rampant during the last 2months. FIIs have sold net equity of more than Rs55,500cr (source NSDL) in FY23 till date, compared to Rs 1,40,000 in FY22. The total selling by FIIs in secondary market is much higher, adjusting inflows in primary & others. In CY22, main index is down by 15% while mid & small caps by 20 to 30%, from high to low.

After this heavy sell-off, market is showing signs of exhaustion, Nifty50 is holding-on to the range of 15,700 to 16,400 during the month. The domestic market can expect further bounce in the short to medium-term. Technically, the broad market is oversold while fundamental valuations has corrected by 20% to below the three-year average. A key reason for current correction is selling by FIIs and reduction in domestic inflows like retail. A drop in FIIs selling will be an important factor for a bounce in the market. For this, the measures to be undertaken by FED and RBI in the coming meet of June will be essential. During the next 2weeks, the market will trade in a range with a mixed bias; in that period good quality names, defensives and value stocks can do better.

The market expects another 50bps hike by FED and 35bps by RBI. If the rate hikes are lower than anticipated, it will have a positive effect in the short to medium-term. Whereas, if it is in-line, we can presume that the next course of market trend will depend on the tone of the statement. If the stance continues to be hawkish, especially showing continued motion of drop in liquidity the shell life of the trend will be low. If otherwise, we can expect further bounce in the market as majority part of the change in monetary policy is factored in the market. In this rally, we can expect sectors like Banks, FMCG, Pharma, Telecom, Communication, and Capital Goods to do well. IT sector should also revert positively in the short to medium-term, however they continue to be expensive on a long-term basis.

We should also note that the corrective fiscal measures announced by the India government to control inflation is positive for corporates though it can have a cascading effect on fiscal in the short-term. This will have a positive impact on staples, FMCG and Agri stocks. The positive outlook on monsoon by India Meteorological Department (IMD) that the country is likely to receive a normal monsoon for the fourth consecutive year, is positive for inflation and economy. Ban on wheat, and limit on sugar exports will help to fight domestic inflation, more steps are anticipated. Lifting of ban on palm oil export by Indonesia and similar measures being considered by other countries for their key products will help reduce global inflation. Another positive outlier is that war between Russia-Ukraine can diminish in the future, opening supplies from both these countries, which has been a key factor for jump in inflation in 2022. The Covid cases in China is reducing too, which will ignite opportunity of relaxation in covid zero tolerance policy and open exports, which also impacted global inflation. There are signs that the inflation will moderate in future which will help central banks to become balanced in the future from aggressive today, however these are early days.