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Photo: Mint

No matter what Q3 GDP readings show, contrast in Indian equities and economy to continue

But the market, which seems to be confident of a faster economic revival, has brushed off this concern for now. Key Indian equity benchmark index Nifty, which is currently at levels of 12859, may soon touch the psychological mark of 13000 if the ongoing momentum continues

Driven by foreign money, India equity indices continue to soar higher. A big sentiment boost has come from the news of successful vaccine trials with higher effectiveness. At the same time, the risk of another wave of infections is still not out of the way. In the West, Covid cases are rising; in India, some restrictions are being imposed regionally.

But the market, which seems to be confident of a faster economic revival, has brushed off this concern for now. Key Indian equity benchmark index Nifty, which is currently at levels of 12859, may soon touch the psychological mark of 13000 if the ongoing momentum continues.

Speaking of economic recovery, India’s third quarter gross domestic product data will be published on 27 November. Many economists are of the view that the contraction in business activity has moderated significantly in the September quarter. Bloomberg’s consensus Q3 India GDP forecast stands at -8.6%.

“India's GDP slump likely moderated sharply to -9% year-over-year in Q3, from -24% in Q2," Miguel Chanco, senior Asia economist at Pantheon Macroeconomics said in a note on 20 November.

“The brisk recovery in industrial production over the last few months is probably the main reason behind the more optimistic Q3 forecasts. Crucially, the demand-side indicators for the third quarter were weaker. Passenger car sales nearly quadrupled from the Q2 nadir, on our adjustment, but this only took sales to 88% of last year's Q3 level. Now that car sales are back at their long-running downtrend, it is tough to see a continuation of the recent momentum. Most of the improvement is likely to come from investment, partly because base effects are more favourable, as it was hit harder in Q2," he added. That said, Chanco feels, India's Q3 GDP rebound will be a very hard act to follow.

Shilan Shah, senior India economist at Capital Economics Ltd strikes a similar note of caution. “Encouraging improvements since then – particularly towards the end of Q3 – mean that output is likely to have fallen by a much smaller 8.0% y-o-y last quarter. Looking ahead, an effective and widely-distributed vaccine could be an early way out and result in a faster economic recovery next year than we are currently forecasting. But plenty of headwinds remain. Even widespread vaccination would not restore India to economic health, as tepid fiscal support and a beleaguered banking sector will weigh on economic growth long after the virus is brought under control," he said in a note on 20 November.

Note that the data for core infrastructure industries for the month of October will also be released on 27 November.

Analysts say, post the recent rally positives such as decent September quarter earnings and vaccine-related developments, are all factored-in. They feel, given the lack of major near-term upside triggers and stretched valuations, Indian equities should consolidate at current levels. They also warn of increased volatility as the November future and options series expires this week.

On the sectoral front, Bank Nifty is likely to be in focus. Last week, the Reserve Bank of India (RBI) imposed a moratorium on the struggling Lakshmi Vilas Bank and forced a merger with the local unit of Singapore’s largest lender DBS Bank.

Secondly, the RBI panel on Friday recommended giving banking licences to large industrial houses. This potentially paves way for the Aditya Birla group, the Tata group and Reliance Industries Ltd to apply for banking licences.

With expectations that economic recovery is gathering pace, consumption and pharma stocks would also be on investors’ radar screens. Among the consumer discretionary space, shares of Titan Co. Ltd hit a fresh 52-week high on Friday after the company said its jewellery business witnessed a mid-teens year-on-year growth (around 15%) for the 30 day festive season starting from Dussehra till Diwali.

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