Equities to be range bound on global uncertainty, weak earnings

The Indian equity market is likely to be range-bound in the near term, given global uncertainty and weak earnings, a Bank of America Merrill Lynch report said on Tuesday.

According to the global brokerage firm, Indian equities had its largest single-day fall in absolute terms with the BSE Sensex falling 1,640 points, and this was largely on concerns of global risk-off due to worries related to China.

In the bloodiest carnage on Dalal Street, the stock market benchmark Sensex on August 24 crashed by 1,624.51 points -- its biggest single-day fall -- and over Rs 7 lakh crore (Rs 7 trillion) got wiped out within hours from the investors' wealth.

However, in percentage terms, the fall on August 24, was merely the 27th largest fall, since 1990 when India was liberalised, BofA-ML added.

On whether the markets would rebound in the near term after a steep fall, the report said that its analysis of past 50 such instances (where markets had a steep fall) in the last 35 years gave mixed results.

"While average one month and three months returns are positive at 2.1 per cent and 4.1 per cent respectively, the probability of positive instances are no better than a toss of a coin," the report noted.

The report further noted that though valuations have moderated, they are still above average.

Moreover, equities typically struggle if FPI inflows dry up at rich valuations.

"We continue to see capital flows stalling till our expected September 17 Fed hike is priced in," the report said and added that ‘we expect equities to continue to be range bound on global uncertainty and weak earnings’.

In a volatile trading session, the BSE benchmark index on Tuesday gave up its early gains and was trading at 25,689.27, down 52.29 points at 1105 hours.

On rupee the report said that the Reserve Bank is likely to eventually defend Rs 65/USD expectations by selling up to $20 billion.

The rupee is currently hovering around 66/USD.   

On rates, it said that the RBI is likely to go for a 25 basis cut on September 29.

RBI Governor Raghuram Rajan, in his third bi-monthly policy of the fiscal, left benchmark lending (repo) rate unchanged at 7.25 per cent as also the cash reserve ratio at 4 per cent.

The Reserve Bank of India has already reduced the policy rate by a total of 75 basis points or 0.75 per cent since January.