Time for some consolidation

With RBI monetary policy this week, focus will be on interest-sensitive stocks

Domestic equities are likely to consolidate this week amid cautious sentiment due to rising tensions in West Asia. With the earnings season underway, we can expect more stock-specific action in the market. Attention will also remain on interest-sensitive stocks, especially with the Reserve Bank of India (RBI) monetary policy meeting scheduled from October 7-9. While a rate cut is not anticipated, the RBI’s commentary will be important, as it will signal the central bank's future course of action.

On the economic calendar, key events to watch include the Federal Open Market Committee meeting minutes, CPI data, UK GDP, and India’s industrial production figures.

Last week, the domestic market experienced a significant downturn, with Nifty falling over 1,000 points and briefly breaching the 25,000 mark, primarily due to weak global cues and heavy FII selling. Nifty declined by 1,167 points (-4.4 per cent) for the week, closing at 25,015. The broader market also saw profit booking, with Midcap100 and Smallcap100 down 3.2 per cent and 2.5 per cent, respectively. All sectors, except metals, ended in the red, with realty and auto experiencing the largest losses of 6-8 per cent. Private banks, financials, infrastructure, and energy stocks fell by 5-6 per cent.

Globally, the escalation of conflict in West Asia increased volatility and heightened investor caution. A weak outlook from European auto manufacturers and comments from the US Fed Chair regarding the pace of future rate cuts further dampened sentiment, leading to profit booking across markets. Brent crude prices surged above $75 per barrel amid concerns over supply chain disruptions due to the conflict, boosting interest in upstream oil companies. Conversely, metal stocks performed well following China's large stimulus and better-than-expected manufacturing data.

On the domestic front, SEBI announced a new framework for futures and options to curb excessive speculation in the derivatives market. This includes raising the contract size to Rs 15 lakh from Rs 5-10 lakh and limiting weekly expiries to one per exchange. Additionally, PMI and GST numbers for last month were somewhat soft, and the auto sector reported mixed sales figures, with growth in two-wheelers but a decline in commercial vehicles.

Profit booking and a risk-off sentiment stemming from escalating tensions between Israel and Iran resulted in heavy outflows from FIIs, which sold approximately Rs 30,600 crore in just three sessions.

On a positive note, last week marked the beginning of the Navratri festival, which could lead to higher spending and boost demand in consumer related sectors. 

As we move forward, the focus will shift to corporate earnings, with TCS set to announce its results on Thursday. For the IT sector, a slow but steady recovery is expected in Q2 FY25, particularly among mid-tier companies with strong offerings in data engineering and ERP modernisation. We anticipate their growth outperformance to continue over the medium term. Revenue growth for Tier-I companies is expected to range from flat to +3.0% quarter on quarter (QoQ), while Tier-II players are projected to see growth between flat and +4.5 per cent QoQ.

Overall, we expect the market to experience volatility in the near term, with an emphasis on stock-specific action as we enter the earnings season.

(The writer is Head- Research, Wealth Management, Motilal Oswal Financial Services)