Indian equity markets will be driven by economic reforms in 2016

Mumbai: Hopes of more reforms, coupled with lower commodity prices and rising consumer confidence, are expected to aid key Indian indices in 2016 to pare their losses in the year gone by.

"The year 2016 is broadly expected to deliver positive returns; for this it is important for markets to have some momentum in reforms, private capex cycle, global stability and growth," Devendra Nevgi, chief executive of ZyFin Advisors, told IANS.

According to Nevgi, other factors such as improvement in bank NPA's and a rise in corporate earnings will buoy the Indian equity markets in the year ahead.

Vaibhav Agarwal, vice president and research head at Angel Broking, predicted that earnings' growth will pick up from the second half of the year and drive the rally forward.

"Investor interest continues to remain strong as favourable macro cues such as low inflation, declining interest rates, cheap global commodities and strong governance are likely to drive improvement in corporate performance over the coming years," Agarwal elaborated.

Other market observers pointed out that India will continue attracting foreign funds over the long term, even as other emerging markets (EMs) like China, Brazil and Russia continue to grapple with a slowdown.

"India is in a sweet spot as compared to other emerging markets given its strong fundamentals, expected improvement in economic growth, lower inflation and cut in interest rates. For these reasons, we expect FIIs' (foreign institutional investors) interest to return to the equity markets," said Nitasha Shankar, vice president for research with YES Securities.

"However, trends in 2016 would also depend on geopolitical events both within India (related to reform announcements) and on the global front. So, while we do expect FIIs to return to India, whether this would happen on a large scale in 2016 or be pushed to 2017 remains to be seen," Shankar maintained.

The unpredictability of foreign funds during 2015 has been blamed for the rout seen in the bellwether indices last year.

Figures from the National Securities Depository Limited (NSDL) showed that the FPIs (foreign portfolio investors) bought stocks and debt worth Rs.63,663 crore (over $10 billion) in 2015 from the previous year's levels that exceeded Rs.1 lakh crore.

Nevertheless, data with the stock exchanges disclosed that FPIs had taken out a total of Rs.20,373.69 crore during 2015.

"Reforms such as the GST (Goods and Services Tax) bill remains the key to attract more foreign flows. Domestic flows are expected to remain buoyant," Nevgi said.

In addition, experts cited that the softness in commodity prices, particularly that of crude oil, is expected to help in keeping a check on inflation and create room for further rate cuts that can help in reviving the investment sentiment.

"With oil and commodity prices expected to remain low, we expect the inflation trajectory to continue to trend downwards in 2016," Agarwal told IANS.

"Assuming a normal monsoon, we expect inflation to remain in the RBI's (Reserve Bank of India) comfort zone giving them enough headroom to cut interest rates further by at least another 50-100 basis points in this year."

Nevgi explained: "Oil and commodity prices are important, but the market sentiments may not change on day-to-day moves. Larger and unexpected movements in short run will however affect the sentiments."

Moreover, with investors' focus now back on the chances of RBI easing key lending rates, inflation rhetoric is likely to become dominant in the initial months of 2016.

"The monsoon would be in the focus, as the rabi crop acreage so far has fallen by over five percent," Anand James, co-head, technical research desk with Geojit BNP Paribas Financial Services, told IANS.

Besides, investors would look forward to parliament's budget session beginning end-February and the US Fed's moves on the next round of rate hikes.

"With the last two budgets being slightly underwhelming when weighed against the markets' hopes, budget 2016-2017 will go a long way in making the market believe again," James said.

"Certainly, more US rate hikes can be expected, but markets would not be as weary of these as much it would if such hikes were fast-paced."

However, on the downside, volatility on account of global divergence on monetary policy is expected to hurt Indian markets, as the US is expected to go in for more rate hikes and ECB (European Central Bank), Japan and China continue with their stimulus programmes.

"The divergence in monetary policy of the US and the rest of the world and the political realignment will flare up volatility in 2016," Anindya Banerjee, associate vice president for currency derivatives with Kotak Securities, told IANS.

Volatility had dented key Indian indices last year, with markets scaling record highs, only to see their valuations drop sharply over the months.

As a result, the two most-quoted indices - the 30-scrip sensitive index (Sensex) of the S&P Bombay Stock Exchange (BSE) and the 50-scrip Nifty of the NSE - fell by five percent and 4.1 percent respectively.

In comparison, the two indices had logged gains of 29.89 percent (Sensex) and 31.38 percent (Nifty) in 2014 to emerge as the best performers globally.