All eyes on RBI MPC meet outcome

Amidst heightened volatility triggered by crash in the Adani Group stocks, the domestic stock markets ignored the positives of the Union Budget and the modest hike in interest rates by the US Fed. However, BSE Sensex rallied more than 1,500 points or 2.5 percent to 60,842 and NSE Nifty climbed 250 points or 1.4 percent to 17,854 during the week ended. The broader markets also had a positive close after ups and downs, with the Nifty Midcap index rising half a percent and Smallcap index up 1.9 percent.

Sectorally, there was a mixed trend with the rally driven by banking and financial services, auto, FMCG and IT stocks, whereas gains were capped by energy, metal, oil and gas, and pharma stocks. The sell-off by FIIs continued with net sales of more than Rs2,200 crore in February till date. It is pertinent to observe that FIIs sold over Rs41,000 crore in January, while DIIs purchased more than Rs4,000 crore shares in current month and over Rs33,000 crore in January. Analysts believe that FII inflows will resume after US Fed announces complete pause in rate hikes and once the fear of global recession & slowdown ends. Without naming the Rs9.1 lakh crore worth carnage in Adani stocks, the regulator Sebi to maintain orderly and efficient functioning of the market has put in place a set of well defined, publicly available surveillance measures (including the ASM framework) to address excessive volatility in specific stocks.

The Union Budget has smartly balanced economic stimulus with fiscal discipline. The stimulus comes from a 33 per cent increase in public investments covering roads, ports, airports and railways. The IT rejig can trigger higher demand if people divert their tax saving towards spending. While both public investments and tax cuts have multiplier effects on the economy, the capex multiplier in India is around 2.5, while the tax multiplier is closer to 1.

So, a one-rupee tax cut can provide only a one-rupee boost to GDP, while every rupee spent on capex will boost GDP by 2.5x. Viewed in this light, the government's unwavering focus on capex is the right call. It is heartening that the government has not frittered away these gains on freebies, but has chosen the path of fiscal consolidation. Near term direction of the markets will be dictated by RBI Market Policy Committee meeting outcome, developments in Adani group stocks, macroeconomic data and global cues.

Prominent companies reporting earnings next weekare Tata Steel, Bharti Airtel, Hero Motocorp, Shree Cement, Hindalco Industries, M & M, LIC, Zomato, and Lupin. Nearly all the Adani group companies Adani Ports and Special Economic Zone, Ambuja Cements, Adani Transmission, Adani Green Energy, Adani Power, Adani Wilmar and Adani Total Gas will be reporting their results also.

Listening Post: The Retreat of the Retail Investors. A pandemic boom attracted scores of Indians seeking gains. Now that some are backing away, the markets risk losing a key support. During the pandemic lockdowns in 2020 and 2021, scores of Indians got hooked on trading stocks, options and cryptocurrencies, driving up shares of companies that were once left for dead. The younger population has flocked to the market as 38 percent of the total registered investors with BSE fall in the 30-40 age bracket, followed by 24 percent in 20-30 and 13 percent in the 40-50 age bracket. The growth has been fuelled by tech-savvy young users, with an age profile of 20-40, who contributed 82 lakh of the 1 crore user additions from 6 crore to 7 crore. Covid-induced market crash in 2020 and the subsequent recovery, easy availability of trading apps for the tech-savvy generation, work from home due to the pandemic and the pursuit of alternate source of income seem to have fuelled the influx of retail investors. The FOMO (fear of missing out) factor has also played out in the market. Many immature young investors were seen buying stocks blindly following the advice of some random people or even friends. The TINA (there is no alternative) impact has also influenced many first-time investors to participate in trading.

Many analysts see a link between the sharp surge in the number of retail investors and the market touching a record high and believed rising retail participation will reduce dependence on institutional investors (local or foreign). Many Indians flocked to new generation stocks such as Zomato, Nykaa, Paytm and others during the pandemic markets boom. Momentum trumped coolheaded analysis of company fundamentals. Many new investors traded Nifty and Bank Nifty options at all hours, placing some trades worth hundreds of thousands of rupees, brokerage statements show. In an important analysis done by the capital markets regulator Securities and Exchange Board of India (Sebi), it has been found that while the number of individual traders in the equity derivatives segment registered an exponential rise between FY19 and FY22, a vast majority of the individuals experienced losses. According to the Sebi analysis, the number of individual traders in the equity F&O segment jumped 500 per cent in FY22, when compared to the number in FY19 - up from 7.1 lakh in FY19 to 45.2 lakh in FY22.

Incidentally, individual traders belonging to age group 30-40 years had the highestshare in participation (39 per cent) across all age groups during FY22. For younger individual traders (20-30 years), the percentage share of participation went up significantly from 11 per cent during FY19 to 36 per cent during FY22. More importantly, nine out of 10 individual traders in the equity F&O segment incurred net losses during both the years -- FY19 and FY22 even as 98 per cent of individual traders in the equity F&O segment traded in options during FY22. On average, loss makers registered net trading loss close to Rs50,000 in FY 2021-22. The average absolute net loss of a loss maker was over 15 times the net profit made by a profit maker. That's not all, however, as over and above the net trading losses incurred, loss makers expended an additional 28 per cent of net trading losses as transaction costs. Even for those that managed to register some profits, between 15 per cent and 50 per cent of the profits went towards transaction cost. The study was based on a sample of all individual clients of the top-10 stockbrokers, accounting for 67 per cent of the overall individual client turnover in the equity F&O segment during FY22. This assumes significance as the findings have once again corroborated what the Indian market watchdog has been saying for long that derivative is a risky instrument for retail investors especially those who are not fully aware of the risks of the instrument. Now some of these so-called retail investors are backing away from the markets after the recent heightened volatility in both domestic and overseas markets. Others are paring their positions or shifting their money to more conservative holdings, such as bonds or cash. Last month trading activity among retail investors as measured by rupee volumes hit its lowest level since mid-2020, according to an analysis of some platforms. These investors are also trading less with brokerages that stoked their enthusiasm earlier in the pandemic, according to earnings reports. What these amateur investors decide to do next will have big implications for the direction of the market.They are still collectively the biggest holders of equities, and any retreat from stocks could remove a steady source of support at a turbulent moment.

Quote of the week: There is only one side to the stock market, not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation

-legendry trader Jesse Livermore

F&O / SECTOR WATCH

Mirroring the heightened volatility in the cash market, the derivatives segment witnessed sharp swings in many stock Futures. Even though the Union Budget of 2023 was better than market expectations, acute selling pressurein Adani group companies made Budget a 'non-event'. In the option segment, Maximum Call Open Interest was seen at 18,000 strike, followed by 18,200 strike. Call writing was seen between 18,000 strike and 18,300 strikes. Maximum Put Open Interest was seen in 17,600 strike, followed by 17,700 and 17,500 strikes. Put writing was seen between 17,700 and 17,500 strikes. The option data suggests that the Nifty trading range can be 17,500-18,200 in coming sessions. Implied Volatility (IV) of Calls closed at 14.91 per cent, while that for Put options closed at 15.62 per cent. The Nifty VIX for the week closed at 15.73 per cent. PCR of OI for the week closed at 1.10 lower from the previous week. PSU banks corrected sharply for better part of the week ended over fears of exposure to Adani Group of companies. The comment by Finance Minister on the banks' exposure to crisis-ridden Adani Group and RBI's statement on health of banking sector also soothed sentiment on Friday. Monetary Policy Committee (MPC) led by Das will unveil the first monetary policy of 2023 on February 8 and is likely indicate the course the RBI will adopt in 2023 as it seeks to strike a fine balance between sustaining growth, while battling against global spill overs. Post Union Budget, analysts see domestic-focused sectors to perform relatively better than those having global exposure. Infrastructure, Banks, Capital Goods, Engineering, Industrials, and FMCG companies may outperform in coming quarters. Earnings for sectors like technology and commodities are expected to be relatively weaker. Stock futures looking good are Amara Raja, Bajaj Auto, Godrej Consumer, FSL, Hindalco, Infosys and Ultratech.Stock futures looking weak Coal India, Divi Labs, GAIL,MGL, Marico, Tech Mahindra and Tata Consumer.