After a rally that took the Nifty past the 11,000 mark, Monday marked a return to reality. The higher inflation, sharply higher trade deficit all played a role in putting pressure on the Nifty. Weak pharma guidance also played its part. Nifty corrected by nearly 3/4th of a percent to close at 10,936 and sharp downside in the Nifty was led by banking and pharma stocks, principally Dr. Reddy Laboratories. The advance/decline ratio was strongly skewed in favour of the declines showing pressure on mid caps. In fact, more than 200 stocks touched new 52-week lows during trade on Monday.
If ever there is evidence of the revival of demand for consumer products, it is the latest quarterly results of Hindustan Unilever. HUVR flattered the street with strong top-line and bottom-line growth. The company reported 19% growth in revenues and a 22% growth in net profits for the first quarter ended June 2018. The company also saw a 200 basis points improvement in EBIT margins. The top line growth has been driven by a sharp revival in the rural and urban demand for FMCG products in the last one year. Additionally, GST has also been favourable for HUVR, especially for its foods business.
With strong crude prices and considering India’s overt dependence on oil imports, the IMF has marginally downsized its growth projects for the next 2 years. In fact, growth projection for 2018 has been scaled down to 7.3% while the growth projection for 2019 has been scaled down to 7.5%. However, India will continue to grow faster than China. India had recently overtaken France to become the sixth largest economy in the world with a GDP of $2.6 trillion and is likely to cross UK soon. However, the abysmally low GDP per capita is the big challenge for the Indian economy.
Higher CPI inflation and weaker IIP growth put its pressure on the INR. The rupee weakened marginally to 68.57/$ after a 3-day rally in the INR. However, there was no evidence of any rush by banks and importers to cover their dollar payables. Markets are expecting the RBI to continue to intervene and defend the rupee at around the 69/$ levels. The rupee fears were led by higher inflation as the markets were worried that higher inflation and RBI putting off rate hikes to October could put further pressure on the rupee. FPIs have also consistently been selling in the equity and debt markets.
The trade war between the US and China may be taking an ugly turn. China may be running out of ideas after its first round of retaliation as it has very little of imports from the US left to penalize. China can only retaliate up to a point as it runs a trade surplus of $376 billion with the US. It has very little imports from the US left to retaliate and could now seek a WTO intervention. China has filed WTO challenge to Donald Trump’s plan to expand tariffs to $200 bn of imports. It may be recollected that the core aim of the World Trade Organization (WTO) has been to encourage and facilitate free trade among the major economies of the world. However, China is of the firm view that America’s actions are against the basic tenets of free trade and goes against the fundamental mandate of the WTO.
Whole sale inflation has been leading the charge with CPI inflation following close behind. Most producers are facing higher input costs and that is reflected in the WPI inflation hardening to 5.77% for the month of June 2018. The sharp spike in WPI inflation was largely driven by higher fuel prices and this is the highest level of WPI inflation since December 2013, at the peak of the financial crisis. It may be recollected that the WPI inflation was in negative territory for a very long time and had only come back into positive territory in the last one year or so. The sharp rise is therefore quite disconcerting.
