Domestic equity benchmarks - CNX Nifty and S&P BSE Sensex - gained around 4% in April on persistent hopes of a rate cut by the RBI during its monetary policy review held on May 3. Hopes for a rate cut strengthened due to easing inflation trends - the Wholesale Price Index (WPI) inflation rate fell to a 40-month-low of 5.96% in March from 6.84% in February. Decline in international commodity prices, particularly gold and crude oil also fuelled the expectations. The central bank reciprocated by cutting the repo rate by 25 bps to 7.25% in its annual policy review held in the first week of May; the third cut by RBI in the current calendar year.
Markets also got some support after sugar shares rose on the news that the Cabinet Committee on Economic Affairs has partially lifted controls on the sector. Although foreign institutional investors (FIIs) did not totally disappoint the market, net buying by FIIs in April declined to Rs 6,407cr in April 2013 compared to net purchases of Rs 10,399 cr in March.
On the international front, positive cues from the US and Europe boosted the market. The US reported strong domestic economic numbers and robust corporate earnings while hope arose of more monetary easing measures in Europe by the European Central Bank (ECB). The ECB met market expectations and cut its key interest rate by 25 bps in the first week of May, its first rate cut in 10 months.
However, gains for the Indian market were checked by continued political turmoil in the country which incited fears of an early general election. Sentiments were also dented on worries that foreign investors could exit some of their holdings due to domestic and global uncertainties. Concerns over India's high current account deficit (CAD) at 6.7% of GDP in October-December also weighed on investor sentiment. Markets reacted negatively after technology major Infosys' lower-than-expected revenue guidance raised concerns about the outlook for the software services exporting sector. Profit booking and a fall in the jewellery and gold loan finance stocks due to decline in gold prices also pulled down the market.
Most S&P BSE sectoral indices rose in the month tracking the broad market trend. The S&P BSE FMCG index emerged as the topmost gainer, up 10.63%, on defensive buying amidst prevalent market volatility and as reports of normal monsoon this year boosted hopes of higher rural sales and lower raw material prices. The index also benefitted from gains in index major HUL due to a strong 14.7% y-o-y growth in its quarterly profit after tax (PAT) and after its parent company Unilever announced an open offer at Rs 600 per share (spend up to $5.4 bn) to raise its stake in HUL to 75%. The S&P BSE Bankex and S&P BSE Auto index rose 10.21% and 9.64% as these rate sensitive sectors gained amid hopes of a rate cut by the RBI. S&P BSE Capital Goods ended 7.78% higher on stock specific buying while the S&P BSE Oil & Gas index advanced 4.62% as shares of oil retailers were boosted by weakening global crude oil prices. Among the rare declines, the S&P BSE IT index fell the most, down 17.08%, on weak revenue guidance by Infosys that affected sentiments for stocks in the sector. The sector was also affected by concerns that the draft US immigration bill if implemented will increase the operational costs of the companies in this export oriented sector. S&P BSE Metal index fell 1.22% on profit booking.
In the month of May, markets will be driven by RBI’s monetary policy announced on May 3, corporate results and FII inflows. Also, global cues will continue to impact the markets. We expect CNX Nifty 50 to end May around 5,850-6,050 (S&P BSE Sensex 19,300-19,950).