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What factors will influence Sensex, Nifty in the week ahead?

It took 29 days for the Sensex to climb up nearly 2,500 points last month, hitting a peak of close to 36284 on January 29. But it took just eight days to lose this hard-won ground, eroding investors' wealth by over Rs 6 lakh crore along the way.

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What factors will influence Sensex, Nifty in the week ahead?

It took 29 days for the Sensex to climb up nearly 2,500 points last month, hitting a peak of close to 36284 on January 29. But it took just eight days to lose this hard-won ground, eroding investors' wealth by over Rs 6 lakh crore along the way. Nifty too has been on a downward slope. So will the bloodbath continue on Dalal Street or is the bull-run likely to continue after a brief correction? Here's a look at the various factors at play that will decide how the markets fare in the near future.

US Market

To begin with, all this is not the LTCG tax effect alone. The sell-off started in the broader markets much ahead of Budget, which also indicated that a fall was due. Moreover, the chaos on Wall Street-on Monday, the Dow notched its biggest intraday decline in history with a nearly 1,600-point drop-and the fact that the MSCI ACWI (All Country World Index) of equity markets dropped 3.4% in the past week, was bound to have a ripple effect on Indian stock market. "It is not LTCG tax effect...Why should anybody do a distressed sell now? Because we have grandfathered, there is no hurry to sell," summed up Finance Secretary Hasmukh Adhia.

So perhaps what we are seeing is a long overdue market correction, and Arun Jaitley's Budget speech was just the trigger. "A lot of froth and unnecessary exuberance had gathered around the stocks, particularly in the mid-cap space and there was no justification when matched against the corporate earnings," Assocham Secretary General D.S. Rawat recently said. Indeed, while the Sensex rose by 31% since January 1, 2016, EPS (earnings per share, which is an indicator of a company's profitability from FY2016 to FY2018) has reportedly only gone up 16%.

Q3 earnings

Pundits expect the markets to correct some more but it's expected to be a short-lived phase as the focus shifts to macroeconomics and earnings. Several big corporate players are yet to announce their results for the third quarter of this fiscal. Hero MotoCorp and Lupin are scheduled to announce their Q3 numbers today. More biggies like State Bank of India, ONGC, Cipla, Tata Steel, among others will also announce their Q3 earnings in the week ahead. Given that the current valuations aren't cheap, a lot here on will depend on whether corporate earnings will revive enough to justify or expand these valuations.

Bond Yields

The current sell-off can also be attributed to concerns over rising bond yields. India's 10-year bond yield has jumped up 115 basis points in the past six months, hitting 7.56% per annum on Friday. Basically, as bond yield rises, equities become less attractive due to the risk factor involved and the markets have historically tended to falter. According to a recent report by Kotak Institutional Equities, "If GST revenues were to pick up in-line with the government's targets and inflation come down in line with the RBI's projections, bond yields could cool down and equity market multiples hold up. If not, bond yields may rise further and equity multiples may decline after holding out in the face of higher bond yields over the past few months." The widening fiscal deficit-projected at 3.3% in the coming financial year compared to the earlier target of 3%-is also impacting bond yields.

RBI monetary policy review

The ongoing RBI monetary policy review will be another key trigger for the market. While the consensus broadly is that the last bi-monthly Monetary Policy Statement for this fiscal-which will be made public tomorrow-will hold the benchmark lending rate, for the third time in a row, some experts have said that a rate hike is on the cards soon. The apex bank is prone to adopting a hawkish stance on inflation, which accelerated to 5.21% in December, breaching the central bank's medium-term target of 4% for a second consecutive month. To compare, retail inflation, based on Consumer Price Index (CPI), stood at 4.88% in November last year and 3.41% in December 2016. Add rising oil prices and the government's plans to raise crop support price to the mix and things certainly don't look good, at least in the immediate future. According to a post-Budget report by HDFC Securities, "Inflation and growth remain the two macro variables, going forward. If we have inflation under control, and growth resurrecting, then we could have another good year ahead, although a repeat of 2017 may not be possible."

Depreciating rupee

The depreciating rupee, which dropped to 64.40 against the US dollar today, a six week low, has further dampened market sentiment. In a recent report Smartkarma Insight Provider Neeraj Monga had said, "India has benefited tremendously from 2015-2017 with moderate commodity prices and much lower yields worldwide. In the newly emerging paradigm of normalisation of global monetary conditions, India will likely be betrayed at the altar. We suspect that at the first sign of a weakening INR, the sell-off in the Indian equity market could become a stampede." Let's hope that does not come to pass.

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