Positive bias likely to continue in mkts

Supported by renewed buying from FIIs, better auto sales data for August month, healthy Q1 corporate earnings, RBI interest rate hike on expected lines and positive global cues; the domestic market continued its northward journey for third successive week. For the week, BSE Sensex added 817.68 points (1.42 percent) to end at 58,387.93 points, while NSE Nifty rose 239.25 points (1.39 percent) to close at 17,397.5 level. In the broader market, the BSE Mid-cap.

Index and Small-cap index added 1.7 percent and two percent respectively. The positive market sentiment, as seen from the recent sharp rally, is likely to percolate into the broader markets this week. FIIs were net buyers for the full week with purchases of Rs6,991.54 crore of equities, while DIIs turned net sellers of equities worth Rs1,765.59 crore.

The Indian rupee witnessed a range bound movement in the last week and ended on flat note at 79.24 per dollar on August 5 against its July 29 closing of 79.26. On expected lines the RBI delivered a 50-bps hike in the repo rate as it continued its effort towards frontloading of interest rate increases while ensuring that the second-round effects of the supply-side shocks are contained and long-term inflation expectations are anchored.

With this rate hike, the RBI has now moved up the repo rate by 140 bps and has now moved to a level of repo higher than the pre-pandemic levels. Importantly, the RBI has retained their inflation projection for the year at 6.7 percent, with Q2FY23 revised down by 30 bps to 7.1 percent and Q3 FY23 revised up by 20bps to 6.4 percent. Observers expect the RBI to moderate the pace of hikes and raise the repo rate by 25-35 bps in September and 25bps in December to 5.90-6.00 percent and pause thereafter to assess the growth-inflation dynamics.

Earnings yield of domestic stock markets are now less likely to fall below the 5% mark even as the RBI continues tightening process. The three key cycles — profit, credit, and Capex — are believed to be key for stock markets and analysts see them comfortably placed, boding well for

equity markets. Between now and December 2022, stocks worth Rs1 lakh crore or Rs1 trillion will be freed from the SEBI mandated lock-in period in companies like Paytm, Delhivery, PBFintech and Nykaa. Even if a portion of this is sold by the investors, the risk to the market isn't negligible. Track the stocks carefully for whipsaw movements. The week ahead is a holiday-shortened one and direction of markets will be dictated by global markets and domestic factors like earnings and macroeconomic data.

Listening Post: The visit of Nancy Pelosi-the speaker of the US House to Taiwan has reshaped geo-political risk in Asia. Big market moves are unfolding in the wake of the speaker's visit and China's response. But they still probably underestimate the real impact. Markets reacted strongly, not catastrophically, but they still don't reflect the real import of the event say observers. The visit marks a significant turning point in Sino-US relations and the cross-strait strategic environment. Losers probably include multinational manufacturers of nearly everything else outside of defence, who rely on a stable and predictable security environment in Asia.

This includes those with an outsize presence in China like Apple, or US firms that depend on Chinese business like Boeing. China's naval drills surrounding the island, which are scheduled to end Sunday, probably won't result in a direct military clash, although an accident or miscalculation can't be ruled out. The problem is that these new exercises—surrounding the island and blocking main routes to key ports—are far more ambitious than anything China has tried before, and look like a trial run for a real blockade, either full or partial. All of this comes as China's economic problems—a dysfunctional housing market, high youth unemployment, rising scepticism among Western multinationals and a capricious regulatory environment—increasingly look structural rather than cyclical. More regular exercises of this sort would have several advantages from Beijing's perspective: They distract from problems at home, they make the US and its allies look toothless, and they serve as practice for an actual invasion or blockade. A real blockade remains very risky—especially since China still needs lots of things, especially advanced microchips, from Taiwan and the Western world. But the persistent threat of a blockade or other 'gray zone' military action could still raise the cost of doing business with Taiwan and weigh on Taiwanese assets in general.

The spat unfolding right now also makes any kind of serious rapprochement between China and the US harder. Initiatives like removing bilateral tariffs may become too heavy a political lift. And multinationals like Apple, eyeing an increasingly unstable geopolitical environment around China's periphery, may be forced to further accelerate their diversification plans—eventually creating more resilient supply chains but significantly raising costs for years. It is possible to construct a case for a more positive outcome. Beijing's intimidation could focus minds both in Taiwan and in the US on the need for much more, and better-targeted spending to bolster Taiwan's defence's, and for already sold arms to arrive sooner. Quiet pressure from foreign multinationals in China and domestic economic interests could convince Beijing that aggressive manoeuvres toward Taiwan are self-defeating because they drive away critically needed investment. But the cycle of escalation—and ideological conflict—also has its own logic that can be difficult to derail and lead to unpredictable outcomes. And Mrs. Pelosi is far from the only important, elderly politician that will be eyeing their legacy in the months and years ahead: Chinese President Xi Jinping himself will ultimately decide what course China takes. Investors, and everyone else, must hope leaders on both sides find wisdom and good counsel to match their ambition. After Russia-Ukraine war, the developments on Taiwan front should not be ignored.

Quote of the week: The four most dangerous words in investing are, it's different this time. Sir John Templeton Follow market trends and history. Don't speculate that this particular time will be any different. For example, a major key to investing in a specific stock is its performance over five years.

F&O / SECTOR WATCH

Buoyed by rally in the broader markets, the derivatives segment also witnessed robust trading volumes. On Option front, maximum Call Open Interest (OI) was seen at 18,000 strike followed by 17,500 strike. The maximum Put OI was seen at 17,000 strike, followed by 16,500 strike. Call writers were under pressure with the highest Call base at the 17,500 strike. Implied Volatility (IV) of Calls closed at 17.09 per cent, while that for Put options closed at 18.70 per cent. The Nifty VIX for the week closed at 19.26 per cent. PCR of OI for the week closed at 1.37. Nifty is trading above the crucial 17,200 level, whereas Bank Nifty in hovering around 38,000 level. In coming week, Nifty is likely to trade in the band of 17200- 17700 levels whereas Bank Nifty may trade in the zone of 37500-38500 levels. Adopt buy on dip strategy.

No particular sector will dominate the market landscape and the coming sessions are likely to stay highly stock-specific in performance. A cautiously positive approach is advised for the week. IT has been one of the worst performing sector for the last few months and has been heavily sold by the FIIs. But looking at the recent US recovery in the growth stocks, a strong relief rally is in offing in tech counters. Contrarian buying is advised in bet IT sector. Post the announcement of the RBI rate hike and macroeconomic data, analysts expect that the themes related to improving credit growth, investment rate and discretionary consumption will be in

limelight. Some of the top stock picks are SBI, InduSind Bank, SBI Life, L&T, NTPC, GAIL, Ultratech Cement, Tata Communications, Tata Motors, TVS Motors and Titan. Important results to watch out for in F&O counters in the week ahead are Bharti Airtel, Adani Ports, Power Grid, Coal India, Eicher Motors, Hindalco Industries, Tata Consumer Products, Divi's Laboratories, Grasim Industries, Hero Motocorp, Nalco, MRF and ONGC. Stock futures looking good are ABFRL, Bosch Ltd, Bharti Airtel, Godrej Consumer, Motherson, Tata Communications and Vedanta. Stock futures looking weak are Alkem, BHEL, Britannia, Chambal Fertilisers, Marico and Tata Consumer.