Bounce back expected if rate is cut

Weakness and negativity seen but here is hoping for a turnaround Tuesday

Tracking the global market movements, it is seen that domestic markets remain mainly in negative zone. But the buying in the beaten down counters and the short covering as of September F&O expiry supported the markets.

Nifty is showing weak momentum and it is likely to test 7600 or even lower levels without some positive triggers. If RBI cuts rates by 25 basis points or 50 basis points then we can expect sharp bounce back towards 8060.

Manufacturing sector
According to a report, the country’s manufacturing sector has improved on a yearly basis in September, but the mining and electricity sector acts as draggers on the activity. The yearly SBI composite Index, an indicator for the manufacturing activity stood at a four month high at 53.9 as compared to 53.4 in the same period last year.

But the monthly index declined to 48.4 in the period under review from 53.1 in the previous month. The report also said that the credit growth were seen in some industries like Drug & Pharmaceuticals, Basic Metals, Petrochemicals, Iron and Steel & Power Sector.

An index value of 42 to 46 means moderate decline, 46 to 50 shows a low decline and 50 to 52 indicates low growth. Also, 52 to 55 show moderate growth and above 55 means a high growth. In the week, the Asian Development Bank (ADB) in its report lowered India’s growth forecast.

The ADB in its Asian Development Outlook reduced the country’s growth forecast for the current fiscal to 7.4 per cent from 7.8 per cent estimated in March on the back of slower than expected pace of reforms and weak global demand.

The bank also said that the slowdown on the Chinese front is dragging down the rest of Asia. It also pared the growth forecast for China by 0.4 per cent points to 6.8 per cent this fiscal and 6.7 per cent next year.
RBI changes

In the week, the central bank proposed changes in the rules for overseas borrowing by companies in order to encourage overseas funding. The borrowing limit for the companies in the services sector is pegged at $200 million while microfinance companies are allowed to raise $10 million aboard annually.

Any loan above these limits could require RBI approval. The RBI has proposed to allow domestic companies to borrow money from pension funds, sovereign wealth funds and insurance funds as a part of external commercial borrowing. Also, the central bank has put forward a suggestion to cap the minimum maturity of ECB up to $50 million at 3 years and 5 years for an amount exceeding $50 million. The minimum average maturity for long term ECB should be 10 years.

Chinese growth concerns were the major drag down for the markets around the globe. On the Chinese front, the Caixin China manufacturing purchasing managers index dipped to a 6.5 year low which added more doubt on the health of the economy. All other markets were simply following the footsteps of the Chinese markets.

In the US markets data like consumer confidence, markit manufacturing PMI, unemployment rate, factory orders, non-farm payroll, initial and continuing jobless claims are the data to watch. Business confidence, consumer confidence, core inflation, inflation, unemployment rate and manufacturing PMI are the data in the Euro zone area.

In the coming week, RBI’s monetary policy will be in focus for the Indian markets. Also, the manufacturing PMI and infrastructure output will be in the look out list. Metal stocks are still in the negative zone and it is prudent to avoid bottom fishing at this sector. Capital goods sector will also continue to under perform the markets.

If there is a rate cut then we can expect rate sensitive sector to move up, on the other hand if the rates are unchanged then we can expect under performance of banking stocks. Crude has support at $44 and below it may find support at $42.75. Resistance for crude is at $47.2 and $48.35 per barrel.

Alex K Mathews is the author of Financial Services And Systems, as well as Option Trading: Bear Market Strategies published by Tata McGraw Hill. He is also the technical and derivatives research head of Geojit BNP Paribas Financial Services Ltd. The author may have a vested interest in investments he has recommended. Feel free to e-mail him at Geojit BNP Paribas has membership in, and is listed on, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

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