Cloudy Outlook

Ramesh Sobti, Managing Director & CEO of IndusInd Bank, has been beefing up his sales force in the two-wheeler vehicle loan segment since the demonetisation drive by the government. "This is the best thing which has happened to India, merging the informal with the formal economy," says Sobti. Only 20 per cent of the total two-wheeler sales happen through financing but all this could change with the impact of demonetisation, believes Sobti. "This would change. It can be easily 40-60 per cent or even 100 per cent going ahead," he says.

While most of India Inc. agree that demonetisation will be good for India in the long run, no one knows how much time it will take the economy and the markets to recover. "We are getting mixed reactions on demonetisation and, therefore, it has become difficult to gauge its exact impact and the time it will take for the economy to bounce back," says Nilesh Shah, Managing Director at Kotak AMC, who is sure that the earnings of companies will be impacted but isn't sure when they will bounce back. "We will have to wait and watch how earnings of India Inc. shape up. Whether there will be a bounce back within three months or will it take six months," says Shah.

Small wonder, then, that the stock market has been subdued since demonetisation. The 30-share BSE Sensex had dipped 897 points or 3.25 per cent till December 8. The Sensex slipped from 27,591 on November 8 to touch a low of 25,718 on November 21 before bouncing back to close at 26,694 on December 8. The slowdown in FII selling in the past few sessions has been the reason for the partial recovery in the Sensex. "Market players including FIIs are booking profits. With uncertainty around earnings, they didn't want to stay invested in the market," says Shah, adding that "the market is in a pendulum state. It will swing according to important events surrounding the market, which includes the US Fed Reserve decision to hike rates and Union Budget in February 2017". Markets will slide further if the Fed hikes rates soon and the fiscal deficit of the government is more than estimated, believe most analysts. "However, I don't see all the events being negative and, therefore, the markets will move up and down until corporate earnings regain sheen," says Shah.

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Indeed, the Reserve Bank of Indias (RBI) decision to lower GDP growth estimates is a clear indication of short-term pain, warn some analysts. "FY17 earnings of old economy companies should be largely negative due to stunted demand and business cycle crackdowns. In this scenario, I expect the (NSE) Nifty to be rangebound with a downward bias. The Nifty should remain between 7600-8400 in the short term till March 2017. By then, the cash currency crisis should also ease," says Gurunath Mudlapur, Managing Director at Atherstone Capital Markets, a Mumbai-based investment bank. "Demonetisation in the short term will have a negative effect on the economy, especially in segments which have been largely dependent on cash to do business," he adds, pointing out that new-generation businesses - such as those related to technology, banking and finance - should come out as winners in this situation. Market players also expect large businesses in organised old-economy sectors like textiles, metals and commodities to also benefit as they will be able to swiftly manage the transition into non-cash modes of conducting operations.

A slowdown in FII inflows on the back of lacklustre earnings by corporates concerns most analysts. The market regained confidence in February 2016 on expectation of improved earnings and the index rose 30 per cent till the end of September 2016. But lacklustre earnings may lead to FIIs selling off which can be a huge dampener for the market. FIIs are still considered to be the lifeline of the Indian markets. Learn to live with volatility and avoid swimming against the tide, caution analysts. "After demonetisation there is a trust deficit among FIIs. The sense that we are getting after talking with some of the big institutional investors is that they aren't confident about the central bank and its autonomy," says Mudlapur. Already, a weak rupee is a concern and any wrong move from the central bank would see further outflow of money from India, impacting overall economy, he adds.

The markets, then, will take a cue from several events. Hardening oil prices would concern most players given its inflationary impact on the Indian economy. A possible Fed rate hike may prevent the RBI from pruning rates over the next few months. If the monsoon next year is weak, it could also weigh on sentiment and drag down the Sensex. Most players are keeping their eyes skinned for these imponderables.

@MaheshNayak