nifty: What is driving the stock market – noise or facts? – Blue Barrows

Despite all the global headwinds, talks of inflation, and recession the Indian markets have seen renewed energy. The past couple of months have been encouraging. In the month of July Sensex gained 9.4%, whereas August witnessed gains of 1.5%.

The market in the short term primarily gets influenced by either facts or noise. The facts for obvious reasons act as a stronger indicator of the sustainability of a trend. Thus, it becomes important to understand what it is that is driving the market.

The following are some of the points that are been discussed far and wide in the market, let’s look at them individually ~

Smart Talk

1. Economic Slowdown in the USA and Europe.

There have been a lot of talks about the de-coupling of India from the West. The opinion is that India will continue to witness growth despite the underperformance of its Western peers. But if we look through history the GDP growth rate of India and the USA have been fairly in line with each other. Depicting that any downward movement in the USA economy will have its trickle-down impact on India too.

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2.But is the Recession in the USA truly bad for the Indian Market?
Holistically the markets move in cycles and it has the tendency to be forward-looking. Therefore, both the good and the bad news gets discounted before it has truly occurred. The news that the West could go into recession is no longer ‘NEWS’. It has been fairly discounted by the market like it had discounted previous major events.

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Thus, when the economy truly goes into turbulence most of the bad news is discounted by then. And markets when they are in the middle of the chaos have limited downside and strong upside potential.

3.FII’s coming back but will
it sustain?
One of the prominent reasons why markets had witnessed a number of steep movements in the past two years was due to the selling of FIIs. From Jan to Mar 2020 the Nifty tanked by 40% during the same period the FIIs sold INR ~54,000 crores. Whereas from May 2020 to Mar 2021 the Nifty gained 71% assisted by the FIIs buying of INR ~272,000 crores. The trend can be seen in the chart below.

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In the latest months of July – August 2022 the FIIs announced their comeback and invested INR 54,157 crore.

The primary reason for them being net sellers was the rising interest rates. Therefore, their full-fledged return depends upon the reversing of rate hikes. It is expected for the interest rates to peak in the next year. The Fed has hiked its policy rate from 0.25% to 2.5%. In the month of July, inflation did witness some relief in the US and stood at 8.5% in July vs 9.1% year-over-year. Thus, in anticipation of rates peaking in the next year, the FIIs could have possibly made a comeback in Indian markets. Which as we now know is a healthy sign of an upward trend.

The market has moved from pessimism to cautious optimism. With better expected corporate earnings going ahead, FII’s coming back and inflation peaking out in India, this optimism seems to be influenced less by noise and more by facts.

Technical Outlook:


Markets pulled back with decent gains of 1.68% this week after falling for three weeks in a row. This fall is considered a healthy correction in an intermediate-term up trend. The bulls got a much-needed breather after a sharp run-up from 15,200. Now that bulls have regained strength, they will try to take out 18,500 levels over the next few weeks. In an immediate term, 18,000 would act as a resistance followed by 18,500. On an immediate basis, support is placed around 17,500.

Expectations of the Week:

Globally, markets are expected to react to the much-anticipated inflation numbers of the USA. The inflation numbers of the USA released last month witnessed a drop and stood at 8.5% vs 9.2% YoY. Global markets will have their keen eye on this figure as it would influence the future course of rate hikes by the fed. Back home, a host of important events are slated to be released. The Indian inflation numbers have been on a declining trend since April 22. Whether this continues or not will be avidly awaited. Further, the balance of trade payments and Export and Import figures would keep the market on its toes. Nifty50 closed the week at 17,833.35, up 1.68%.