The correction in Indian equities over the past few days is set to continue with the markets looking for direction from domestic and international developments.
Investors will be closely watching quarterly earnings from bellwethers that make the S&P BSE Sensex, expiry of the April derivative contracts today, domestic macroeconomic data and the outcome of the US Federal Reserve meeting that ended last night, among others.
The benchmark BSE share index closed down 0.6 per cent at 27,225.93, while the broader NSE index closed down 0.5 per cent at 8,239.75.
“After witnessing a sharp broad-based sell-off recently, Indian equities seem to stay in a range bound trajectory with a positive bias going ahead,” said Sandeep Sharma, a senior research analyst at Hem Securities in Jaipur.
“Investors should use the recent fall as an opportunity for investment buying. They should invest in the good fundamental companies with a longer term view. Strategy would be to buy on dips for those who were left out in the sharp rally in Indian equities since about last year.”
Mr Sharma cautioned that day traders should avoid trading in the wild swings of the market. “Rather if he/she does; one should trade with strict stop-loss. One can [also] follow technical levels to trade on.”
Other analysts had similar views on the factors that will affect Indian equities in the short term.
Vinod Nair, the head of fundamental research at Geojit BNP Paribas in Kochi, said the April expiry of derivatives is the one to watch out for.
“Overall it’s a volatile time. Hence it is best if avoided or strategise on Nifty spread themes at about 100 points from current level [of 8,250 points for Nifty].”
“It is a good time to add in this consolidation. [It] is fair to believe that market can consolidate after a strong outperformance last year,” Mr Nair added. “Now we are in a structure where earnings growth and expectation are consolidating. During this time, investors should look at manufacturing sectors like defence, auto, consumer durables and capital goods.”
Meanwhile, Indian traders on Tuesday extended fewer April CNX Nifty Index futures than the average rate over the past six months, signalling caution before the securities expire today after three days of selling by foreign investors.
The rollover in April index futures was at 37 per cent, as investors replaced current-month derivatives with May contracts. The rate compares with a six-month average of 43 per cent two days before expiry. Global investors sold a net $66 million of index futures on Monday, capping a third day of outflows.
The lower rollover rate comes after a stretch of losses for stocks, with the 50-member Nifty poised for a second straight monthly drop in April. Concern that corporate earnings growth will slow pulled the index’s valuation to 15.5 times projected 12-month profits on Tuesday, the cheapest since May 2014.
“We are not out of the woods yet and there is fear the Nifty can crack until 7,700,” said Akash Dharia, the head of derivatives at ICICI Securities. “Some long rollers are waiting on the sidelines. They would rather unwind their positions than roll to the next series.”
Separately, foreign investors are turning net sellers of Indian bonds for the first time in 12 months as a debate over retrospective tax on capital gains reinforced concerns that bureaucracy will be hard to unravel.
India’s 10-year sovereign bonds yesterday fell for the first time in three days. The yield on government notes due July 2024 climbed two basis points to 7.78 per cent and has risen four basis points this month. The rupee weakened 0.1 per cent to 63.18 a dollar and has lost 1.1 per cent this month in Asia’s worst performance.
Global funds have pared holdings of rupee-denominated debt by $242m this month, on course for the first withdrawal since April last year.
The demand for backdated minimum alternative tax (Mat) threatens to undermine foreign funds’ perception of the one-year old government, after the prime minister Narendra Modi campaigned on promises of cutting red tape for investors.
An inefficient bureaucracy and a maze of regulations caused India’s rank to drop to 142 of 189 countries on the World Bank’s latest Ease of Doing Business Index, while China rose several notches to 90.
“The fear of inconsistency in policies is spooking foreign investors,” said Nizam Idris, the head of foreign exchange and fixed income strategy at Macquarie Bank in Singapore. “This is a retrospective tax pulled out of nowhere and imposed on current investors, and the fear is that there could be other things that the government could do to extract more tax revenue from investors.”
The finance minister Arun Jaitley in his budget speech in February said overseas funds do not need to pay a 20 per cent tax on capital gains from April 1. He reiterated that in an interview to a local television channel this month, while clarifying that investors will have to pay the levy for prior financial years, involving about 400 billion rupees (Dh23.1bn).
The Central Board of Direct Taxes said foreign portfolio investors can use tax treaties to reject demands on past capital gains, seeking to defuse the row as it threatened to jeopardise the $57bn global funds have pumped into Indian stocks and bonds since the end of 2013.
“It’s a very touchy issue for a whole host of foreign investors and they have all been taken aback,” Ananth Narayan, the Mumbai-based head of South Asia financial markets at Standard Chartered, said in an interview with Bloomberg TV India last week.
“It’s gone to the bad old days where people were not clear about the rule of law in India. It’s very critical that we get a quick closure on this.”
Tax issues have prompted a joint venture between New York- based investment manager Blackstone Group and the Embassy Group to shelve plans to list a $2bn real estate investment trust in India.
India already has a number of tax disputes involving foreign entities. Cairn India is contesting a $3.3bn claim on gains made by its former UK-based parent in a share transfer pricing case, while a dispute over the British telecoms company Vodafone’s 2007 acquisition of Hutchison Whampoa’s Indian business is going into international arbitration.
In the budget Mr Jaitley delayed implementation of the so-called general anti-avoidance rules until April 2017.
The rules, which seek to prevent companies from routing transactions through other countries to avoid tax, had spooked foreign investors when it was first proposed in 2012.
The Mat issue comes at a time when gains across India’s financial markets are reversing, signalling investors’ dwindling fixation with Mr Modi as opposition politicians hamper his ability to push through reforms to attract foreign capital.
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