Is Indian Markets Entering Consolidation Phase?

In the vast ocean of financial markets, the Indian stock market seems to be catching its breath, entering a phase of consolidation. As the dust settles from the recent market turbulence, there's a palpable sense that the market is gearing up for the next leg of its journey.

The Nifty, after a 3.1% decline from its peak on July 20, hints at a temporary pause in the relentless ascent witnessed in the past. A breather, if you will, before the market gears up for its next move.

What's driving this phase of consolidation? Behind the scenes, a compelling story is unfolding. Imagine a rocket shooting skyward, symbolizing the soaring trajectory of GREED & Fear's Indian portfolio in the early part of the previous month. However, the upward momentum has slowed, signalling a strategic shift.

 
Diving into the portfolio, we find a significant allocation of 60% towards financial and property stocks – assets sensitive to interest rates. The recent monetary tightening has influenced this strategic move, prompting a reevaluation of risk and return dynamics.

A critical player in this narrative is the capex cycle, gradually gaining momentum amid the consolidation phase. Cement companies, in particular, are at the forefront, exhibiting robust volume growth, estimated at an impressive 15-16% YoY in the first quarter of FY24. Prateek Kumar's insights echo industry sentiments, forecasting double-digit demand growth for the sector in the upcoming fiscal year.

 
Remarkably, if this projection materializes, it would mark the first instance in three decades where India's cement demand experiences double-digit growth for two consecutive years. Cement prices, too, have followed an upward trajectory, witnessing a 14% rise over the past four years.

However, like any financial tale, challenges emerge on the horizon. July's headline Consumer Price Index (CPI) surged to 7.4% YoY, fueled primarily by food inflation, reaching the highest level since April 2020. Core inflation, while holding steady at 4.9% YoY in July, remains a key metric to watch.

 
The Reserve Bank of India (RBI) is navigating these turbulent waters cautiously, having kept the policy repo rate unchanged in the past three monetary policy meetings. Despite a 250 basis point hike since May 2022, the current rate stands at 6.5%, demonstrating a commitment to balance growth and inflation concerns.

Zooming out, the macroeconomic landscape remains encouraging. Gross fixed capital formation as a percentage of Indian nominal GDP has seen a positive uptick, rising from 27.3% in FY21 to 29.2% in FY23 – the highest level since FY19. The impending GDP data release on August 31 holds the key to unveiling the next chapter in India's economic narrative.

In the intricate dance of financial markets, the Indian scenario paints a picture of resilience and adaptation. As we navigate through this consolidation phase, the story of India's markets unfolds, driven by factors ranging from capex optimism to inflationary challenges. The journey continues, and investors eagerly await the next plot twist.