Domestic equity benchmarks - S&P CNX Nifty and BSE Sensex - ended around 0.5% higher in December tracking upbeat domestic and global cues. The markets began the month on a positive note as the moderation in India’s gross domestic product (GDP) to 5.3% in July-September 2012 from 5.5% in the previous quarter fuelled rate cut hopes by the Reserve Bank of India (RBI) at its mid-quarter monetary policy review later in the month. While the central bank did not cut interest rates at its policy review, it hinted at monetary easing in January which aided market gains. Other positives such as passage of key bills - foreign direct investment (FDI) in retail sector, Banking Laws (Amendment Bill), 2011 and Companies Bill, 2011 - in the parliament during the month, which will aid the banking and investment environment in the country, also helped curb losses in the market.
Globally, optimism over resolution of the US fiscal cliff after US lawmakers started negotiating a budget deal towards the end of the month also augured well for the Indian markets in the month. The US senate approved the deal to avoid the fiscal cliff which was to come into effect from January 1, 2013 – the increase in taxes was restricted to the wealthiest 1% Americans and cuts in public spending were delayed by two months. The market was also supported by continued and strong foreign institutional investor (FII) buying. FIIs were net buyers of secondary market equities worth Rs 24,299 cr in December 2012 compared to net buying of Rs 10,967 cr in November 2012.
Gains for the markets were, however, capped on strong domestic industrial production data which dampened investor sentiment about a rate cut by the RBI despite fall in monthly inflation data. India's industrial growth touched a 16-month high of 8.2% in October (against a contraction of 0.7% in September) while headline Wholesale Price Index (WPI) inflation fell to a 10-month low of 7.24% in November (compared with 7.45% in October) due to easing in annual fuel and manufacturing inflation rates. Tussle in the US throughout the month over passage of a bill to evade the fiscal cliff also kept investor sentiments on tenterhooks.
BSE Sectoral indices ended mixed in December. The BSE Metal Index gained the most, up 6.91% as metal stocks got a boost by positive economic data from China which enhanced demand prospects for the sector. BSE Auto followed with gains of 5.66% due to upbeat monthly sales numbers for index heavyweights such as Tata Motors and Bajaj Auto. The BSE Oil & Gas Index advanced 3.23% as the sector shares rose on reports that the government is considering raising prices of diesel and kerosene over the next 10-24 months. Among the laggards, the BSE IT Index declined 3.47% as technology shares were affected by disappointing revenue outlook for 2013 from Cognizant Technology Solutions and uncertainty over the fiscal cliff in the US.
We expect the markets to be driven by policy announcements by the Indian government and the developments in the US and Eurozone in the coming months. The budget in February will decide the course for CAD and is a key monitorable. RBI’s monetary policy and FII inflow will remain key factors in Indian markets in 2013.