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Of Rising Stock Markets, Reduction in Government's Additional Borrowing, and Top Cues in Focus Today
Thu, 18 Jan Pre-Open

Share markets in India closed on a strong note yesterday.

At the closing bell yesterday, the BSE Sensex crossed its 35,000 mark for the first time and stood higher by 311 points (up 0.9%) and the NSE Nifty closed up by 95 points (up 0.9%). The BSE Mid Cap index ended the day up by 0.7%, while the BSE Small Cap index ended the day up by 0.4%. Gains were seen across all sectors with stocks in the banking sector and IT sector leading the gains.

Top Stocks in Focus Today

From the pharma sector, market participants will be tracking Sun Pharma share price. The has settled a patent litigation with Ironwood Pharmaceuticals Inc and Allergan plc in the US over a generic version of Linzess - a drug used to treat bowel problems.

From the PSU sectorBHEL share price will be in focus today. The stock of the company witnessed buying interest yesterday after the state-run power equipment maker bagged an order worth Rs 28 billion.

Ashok Leyland share price will also be in focus today. The company has signed a Letter of Intent (LoI) with Israeli firm Phinergy for use of aluminum air batteries for Electric CVs in India. Phinergy is a leading developer of clean and high energy-density systems based on metal-air technology. With its aluminium-air battery, Phinergy has developed a revolutionary way to generate electricity using aluminium as an energy source.

Sensex Crosses 35,000 Mark...

The Sensex crossed its 35,000 level for the first time yesterday. Most of the buying interest was seen on announcement of reduction in additional borrowing by the government and expectations of big changes in the Goods and Services Tax (GST) Council's next meet scheduled on Thursday.

The domestic equity markets have been in an uptrend lately. In 2017, India was among the three emerging markets, which gained more than 35% in dollar terms. The other two were Hungary and South Korea.

The BSE Sensex earned a 35.1% return in the dollar terms and 28% in the local currency in 2017. However, this wasn't enough to beat the midcap and smallcap indices. The midcap and smallcap indices saw a sharp increase of 47% and 58% respectively in 2017.

Now that the markets are at an all-time high, investors should brace themselves for the increasing volatility. Although, earnings are likely to recover, profit margins could get squeezed as companies face rising input cost pressures.

Further, rising oil prices may prompt the government to abandon fiscal prudence at a time when GST collections have been lower than expected.

2018 will, therefore, be critical for Indian companies to justify their valuations with earnings growth.

If the earnings growth does not materialize, a stock market correction could be on the cards.

Government Cuts Extra Borrowing

In the news from macroeconomic space, India cut its additional market borrowing requirement for the current fiscal year by 60%. This was done after reviewing trends in revenue receipts and expenditure patterns.

The Finance Ministry said that the government would only borrow an additional Rs 200 billion versus an initial plan of Rs 500 billion for FY18.

This comes as a welcome breather as it would help in achieving the fiscal deficit target during this financial year.

Note that in the last one decade, India is making serious efforts to reduce the fiscal deficit level. Ever since, the new government came in it has been in favor of fiscal consolidation and meet the long term fiscal deficit target of 3% by FY17-18. This will be the lowest target compared to the last couple of years.

That said, challenges remain in achieving the above stated target. The notebandi exercise resulted in a slowdown. Further, government announced flurry of projects but execution is still pending. This means the government needs to relax its spending to spurt the growth again.

This means, once again, the government needs to fight dual challenge. First, maintaining its stance on fiscal consolidation and sticking it fiscal deficit target of 3% of GDP for FY17-18. Second, it must relax the deficit target for reviving the economic growth from the shock of demonetisation.

It is also worthwhile to note that creating economic growth by the government spending its way out of trouble, cannot continue indefinitely.

As Vivek Kaul writes in one of his recent editions of the Vivek Kaul's Diary... 'At the end of the day the government has a limited amount of money at its disposal. Further, its expenditure tends to be terribly leaky and does not reach a major portion of those it is intended for.'

It would be interesting to see how the above reduction in borrowing aids the economy. We'll keep you updated on the developments from this space.

Gold Witnesses Selling Pressure

In the news from the commodity space, gold is witnessing selling pressure this week. Losses are seen on the back of a firm dollar and a weak trend in precious metals overseas.

To keep a tab on the movements in gold and other commodities, you can read the stock market commentary from the Daily Profit Hunter team. Their commentary tracks the developments in the global economy as well as stock, currency, and commodity markets.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

Read the latest Market Commentary


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