Central bank’s commentary on growth, inflation would be keenly watched
India’s stock markets continued to touch new highs on investor hopes that the economy will rebound in line with the receding second wave of the pandemic and acceleration of the vaccination programme.
The markets gained nearly 1% ahead of the Reserve Bank of India’s monetary policy review on Friday. Market participants are expecting RBI to keep key interest rates unchanged. The central bank’s commentary on growth and inflation would be closely watched.
Both the benchmark indices hit record closing highs on Thursday. The BSE Sensex edged 382.95 points or 0.74% higher to close at 52,232.43. The Nifty gained 114.15 points or 0.73% at 15,690.35. While the Nifty hit its new intra-day record high of 15,705, the Sensex closed just a tad away from its previous all-time high of 52,516, that it had hit in February this year.
Shares in other markets in Asia-Pacific were mixed on Thursday with Japan’s Nikkei gaining 0.46% while South Korea’s Kospi closed 0.72% higher. Hong Kong’s Hang Seng fell 1.13% and the Shanghai Composite in China was down 0.76%.
“Global cues were mixed as investors weighed inflationary concerns ahead of the key US economic data. The overall structure of the market remains positive as states gear up to unlock their economy in a phased manner, with fresh covid cases continuing its southward trajectory. The vaccination programme has gathered some pace and with increase in supplies soon, the drive will gain further momentum. Thus, as the second covid-19 wave continues to recede in India and the pace of vaccination picks up, we expect the long-term fundamentals to remain intact," said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services.
Services activity contracted in May, snapping eight months of expansion, and reflecting the severity of the second wave of covid-19 and subsequent regional lockdowns.
Data released by IHS Markit on Thursday showed purchasing managers’ index (PMI) for services fell to 46.4 in May from 54 in April. A figure above 50 indicates expansion, while a sub-50 print signals contraction.
“The contraction in the services index shows the bigger hit to contact-intensive activities during the second wave of movement curbs. However, the activity loss is still marginal, compared to the near-washout seen during the first virus wave in April-May last year. Services activity fell as new orders declined and as movement restrictions led to shutdowns at some firms. Companies reported a decline in consumer demand across products, with business optimism also fading," said Rahul Bajoria, chief economist, Barclays India. The monetary policy committee (MPC) is widely expected to support the fragile economy through its policy stance.
“While policy rates are likely to be unchanged, it will be key to see if RBI MPC suggests any changes to growth forecast. Q1FY22 so far has been muted given the pandemic and resultant localized lockdowns. Bond markets would also be eager to see G-SAP (government securities acquisition programme) 2.0 announcement for July-September quarter, as government bond supply may not be met with commensurate demand. Bottomline: despite inaction on the rates front, walk-the-talk will be key to market movement post policy," said Lakshmi Iyer, chief investment officer (debt), Kotak Mutual Fund. Meanwhile, India Volatility Index (VIX) declined 8.5% to 15.75, showing that anxiety among investors is cooling off.