Wait and Watch

Tthis March, the BSE Sensex recorded its biggest monthly gain in 50 months. It rose over 10 per cent and closed at 25,341 on March 31. The last time it had risen over 10 per cent in a month was in January 2012 (it had jumped 11.25 per cent then).

One trigger was a clear signal from the Budget that the government would stick to the fiscal stability path and maintain the fiscal deficit target for 2016/17 at 3.5 per cent of gross domestic product or GDP. This saw foreign institutional investors, or FIIs, investing over $3.1 billion in Indian equities during the month. The 10 per cent rise brought down investors' loss in 2015/16. The Sensex lost 9.35 per cent in 2015/16. Until February, it was down nearly 18 per cent. The fall was due to over $5 billion outflow from FIIs that sold equities across the globe due to fears over the US Fed hiking rates.

In March, investors also took comfort from the fall in retail inflation in February to 5.18 per cent, as against 5.69 per cent in January, as well as the dovish stance from US Fed chair Janet Yellen that raised expectation that the Reserve Bank of India, or RBI, will cut rates in its policy on April 5. "The Street is expecting a cut of 25-50 basis points," says Nilesh Shah, Managing Director, Kotak AMC.

While US Fed action and developments in the euro zone and China will have a bearing on FII flows and, by extension, on India's equity markets, the most important trigger will be the rate cut. The other important event(s) will be the passage of key Bills in the second phase of the Budget session of Parliament starting April 20. The market is hoping for passage of Bills, including the bankruptcy law, to improve the ease of doing business. Expectation of a good monsoon and rollover of $26-billion foreign currency non-resident deposits coming up for renewal in September will also be key to economic growth in 2016/17.

But the most important factor has to be recovery in corporate profitability that is expected to start from the third quarter of 2016/17. "At present, corporate profitability to GDP is abysmally low at 4.2 per cent. Normally, it is 6-7 per cent," says Shah of Kotak.

But there are risks, too. "With the positives being discounted, any disappointment will trigger a sharp fall," he says. So, probability of the market falling rather than rising means people should tread cautiously and wait for the events to unfold before investing. Investors will be better off by paying a higher price for certainty than risking their money.