The RBI monetary policy at the start of Oct-21 maintained its dovish stance, but the minutes revealed that even the RBI governor was wary of rising inflation. Like in the US, the RBI also realized that inflation was here to stay much longer. Towards the end of the month, there were a spate of FPI downgrades, which resulted in negative FPI flows. All these factors triggered the late sell-off in frontline stocks.
The big event in the Indian markets is likely to be the spate of IPOs, most of them from expensive digital properties. Nykaa plans to raise Rs5,400cr, Policybazaar will raise Rs5,800cr and Paytm proposes a whopping Rs18,300cr IPO. These 3 digital IPOs will mop up close to Rs30,000cr and most of them are likely to be aggressively subscribed, at least by QIBs. One justification for the late fall is that FPIs are reallocating money from the secondary market to primary market. That is a justifiable case of asset allocation but we have to await confirmation.
Concerns over Fed, VRR, Valuations, cost inflation, IPO rush and COVID
The returns of +0.30% on Nifty was subdued but bulk of the Nifty gains were ceded in the last one week. There were 6 triggers that defined Oct-21.
a) Fed has started talking hawkish and hints at taper starting as early as November or December. That opens up the possibility of rate hikes being front-ended
b) Variable Rate Repos played spoilsport in the month after RBI sucked out liquidity worth Rs50,000cr. Combined with IPO financing curbs, it spooked markets.
c) Valuations were back in focus after 3 FPIs; UBS, Nomura and Morgan Stanley downgraded Indian equities from overweight to neutral.
d) Cost inflation was a key challenge evident in quarterly results as major FMCG companies took a profit knock on higher input costs.
e) The spate of IPOs worth Rs40,000cr in the next 2 weeks is likely to see reallocation of funds from the secondary markets and is a major overhang.
f) Finally, COVID is rearing its head in UK, Europe, China and Russia. Combined with Evergrande and weak China GDP, it raises fears of a hard landing.
Sectors that outperformed the Nifty in Oct-21
For Oct-21, out of the 10 key sectors with significant presence on Nifty, 4 sectors gave positive returns while 6 gave negative returns. Like the large caps, the mid-caps also gave up most of their gains of Oct-21, although mid-cap index closed more convincingly in the green.
Which sectors did better than the benchmark Nifty? The star of the month was the PSU bank index giving 13.78% returns in Oct-21. The rally was led by the redoubtable SBI, but other banks like PNB, BOB, IOB and Bank of India followed suit on hopes that the NPA scenario was getting benign. Autos were a major gainer but largely on the back of Tata Motors. Stocks like Maruti rallied despite tepid numbers on hopes that the demand-supply gap should actually suit auto companies.
Like PSU banks, the private banks also outperformed as was evident from the robust performance of the Bank Nifty. However, the VRR hawkishness of the RBI did spook banking stocks towards the end of Oct-21. Consumer durables also well gaining 4.26% on hopes of participating in revenge buying without input cost worries.
In a rare case, the FMCG index lost 5.45% in Oct-21 but that was par for the course as most FMCG stocks came under cost inflation pressure. IT stocks reported good numbers but markets were unhappy with the surge in attrition rates to 18-20% level. That triggered a sharp fall in IT companies. In the case of Pharma it was more a case of companies losing their way after COVID euphoria. The structural story is still missing in pharma.
The month of Nov-21 will be driven by two factors. The first factor will be how the liquidity tightening plays out in the US and in India. If the US goes ahead with the taper, talks tough on rates and the RBI pursues VRRs and limits on IPO financing aggressively; markets are likely to be worried. The second factor will be how the IPO market responds. India has not seen a rush of IPOs worth Rs40,000cr in 15 days’ time. That will be the litmus test and actually set the tone for the markets in November 2021.