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Another week of market whipsaws as the overall sentiment remains ‘Sell on Rise,’ with Bears tightening their grip on every substantial upmove. This week’s RBI MPC meeting helped boost market sentiment temporarily as the policy was more dovish than predicted.

Contrary to market expectations, the MPC’s policy appears to favour growth drivers while downplaying inflation, as the MPC decreased the inflation forecast for the fourth quarter of FY22 and first quarter of FY 23 to 5.7%/5%, respectively. At the same time, the US Federal Reserve, is aiming to phase out the term “transitory,” implying that inflation is here to stay.

In fact, nations like New Zealand and South Korea have already raised interest rates. Others, like the Great Britain and Russia, are expected to follow, as various central banks increasingly see inflation as a critical risk and are announcing policy measures to combat it.  However, it appears that India will remain a backbencher on this front and may look to establish a defined path for rate hikes in the future policies.

But the key question is why is the MPC policy still inclined toward growth? The reason is uneven economic recovery! While the GDP figures appear to be reassuring, private consumption, which accounts for more than 60% of our GDP, remains over 3% below pre-pandemic levels. Furthermore, the unorganised sector is still suffering from pandemic blues and is under-represented in GDP figures.

Many post-earnings management commentaries, particularly in the FMCG industry, stressed the slowing of rural demand. While we may celebrate that GDP statistics are slightly higher than pre-pandemic levels, we are still far behind where we would have been if the pandemic had not occurred.

Given these considerations, as well as the possible danger posed by Omicron, it appears that MPC’s best course of action at this time was to continue supporting the broader economy. However, for how long can the MPC policy not tilt towards inflation, is a wait and watch event.

Event of the week

The last month’s insurance data indicate that premiums have been witnessing a pickup in growth, with private insurers continuing to drive the sector’s growth. The life insurance industry had a small rise in the number of policies sold on a year-over-year basis with new business premium collections growing by 41.85%.

Life insurers’ bottom lines had suffered a significant hit earlier in the year as a result of rising claims, increased premiums sought by reinsurers, and tightening of underwriting norms. However, given that the pandemic has substantially altered perception towards insurance, margin pressure is projected to ease in the future.

The long term investment opportunity in this sector remains intact as the low penetration of insurance as a percentage of GDP provides significant headroom for growth.

Technical Outlook

Nifty 50 closed positive for the second week after witnessing a bounce from the demand zone around 17,000. The index is facing resistance around 17,550 and is currently trading around its 20 DMA. The last two trading sessions of the week exhibited indecisiveness and Nifty50 continues to trade below the major rising trend line.

Similarly, Bank Nifty is also struggling to surpass its resistance at 37,440. All these pieces of evidence hint at limited upside in the short term. Traders are therefore advised to maintain a neutral to mild bearish outlook till Nifty holds its ground above 17,550 levels.

Expectation for the week

Domestic inflation data and the FOMC meeting will be crucial events that will dominate movements in the Indian benchmark indices. Because the RBI provided no guidance on the rate hike timeline, all eyes will be on the stand FOMC adopts on tapering and interest rate hike trajectory.

While it is widely expected that the FED will consider the intensity of the Omicron variant before aggressively preponing tapering plans, any surprises in the announcements can cause choppy movements. Thus, investors should remain cautious and consider value investing till the markets continue to let off steam from excess valuations. Nifty50 closed the week at 17.511.30, up by 1.83%.

(This article is written by Ms. Yesha Shah, Head of Equity Research, Samco Securities )