Nifty seen rangebound at 7900-8300

Turbulence in markets continues as Indian equities grapples with rippling effect of demonization. Consistent pull out of foreign funds is not helping either. Global markets were also jittery as Italy went in for major constitutional referendum preceding Sunday. Profit taking and cautious mood is observed as market prepare for outcome of Italy's referendum and RBI's monetary policy in ensuing week.

On the macro-economic front India's GDP grew 7.3% in 2QFY17 better than +7.1% in 1QFY17. This was primarily driven by consumption growth (8.9% YoY) through higher government spending (being the highest in last eight quarters) though investments marked second-worst contraction (-6.8%) since FY02. Domestic savings fell to 28.6% of GDP in 2QFY17, among lowest levels since FY05. Real gross value added (GVA) - the basis of GDP estimate - grew 7.1% YoY in 2QFY17. Growth was lower than +7.3% in 1Q, but slightly exceeded our estimate of +7%. Although agriculture & industrial sector growth was lower than expected, the impact was more than offset by the services sector, led by higher growth in 'community, social & personal services'. This paints an alarming picture where consumption push is by Government while industrial capex is showing no signs of pick up yet. With demonetization in effect from 8-November 2016, real GDP data for 2HFY17 will be keenly awaited. While investments are unlikely to pick up, consumption is also likely to suffer, leading to overall lower growth, in our view.

However, on the brighter side central government posted a surplus of INR246b in October 2016 because of which fiscal deficit in the first seven months of FY17 was 79.6% of budget estimates (BE), as against 84.5% in the first half of FY17. The fiscal surplus was primarily a result of high growth (87% YoY) in receipts but a muted growth (~11%) in total spending in Oct-16. Within total spending, there was actually an inflow (not outflow) on capital account, reflecting repayments from state governments/PSUs. This is a rare scenario, which happened for the second time last month over the last two decades (the only other time was in Nov-2010). Further, the Eight Core Industries Group (38% of IIP) grew at 6.6% YoY for the month of October 2016, led by refinery (+15.1% YoY), steel (+16.9% YoY), cement (+6.2% YoY) and electricity (+2.8% YoY).

Another, encouraging aspect has been thick and fast inflow of demonetized currency denominated in Rs 500 and Rs 1000 into the banking system. The quicker it comes the faster economic activity will revert back to normalcy. Our dealer checks suggest fast recovery in business activity from initial days of standstill. Corporate business is almost back to normal and retail is on fast recovery mode at least in tier1 and tier 2 cities.

We expect high volatility in markets as Global and Domestic macro-economic events are decoded and discounted by markets. Nifty is likely to gyrate in the broad range of 7900 to 8300, where corrections are likely to be bought into by value pickers.

The writer is Head –Retail Research, MOSL