MARKET SPIKE

What does the market spike mean?

On Aug 13, when the whole market was pessimistic, I stuck my neck
out and said the market will look up before Diwali, what with a good
monsoon and a few good reforms initiated by the government.
I have been proved right today. The market zoomed 1900 points
today and there has been a lot of improvement in your portfolios. In
the past few weeks, we saw that the automobile sector was
bleeding. But today, the auto sector zoomed 8.5%, possibly a record
in a decade.
The market jumped because Finance Minister Nirmala Sitaraman cut
corporate tax, ensuring a far better structure than in other countries.
Although the government may lose revenue of Rs 1.45 lakh crore,
renewed activity across industry is likely to offset the revenue loss.
Moreover, the recent RBI payout of Rs 1.76 lakh crore will cushion
the market. With inflation under check, RBI may go in for one more
rate cut. That will, in turn, reduce the borrowing cost for individual
borrowers as well as corporates.

Will the market look up?

For an economy to grow, there should be two elements: lender and
borrower. For a year, bank deposits have been growing but the
credit off-take was low.
In July this year, the credit-to-deposit ratio was 76.51% versus
74.735% in 2018. This means, people have started to borrow.
However, with Non-Banking Financial Companies in doldrums, the
credit off-take for auto, consumer durables and housing reduced
drastically in the one year. That impacted the economy. Now, the
government is planning to push credit in 400 districts through public
sector banks but support NBFCs with credit. With the new initiative,
NBFCs will be able to lend Rs 32,000 crore. This will kick-start the
economy in the coming festival season and in the upcoming harvest
season, which is few months away.
Along with the slew of measures announced today, if some cut in
GST is provided, it will boost the sagging economy.

Should you start investing now?

No. Any push will require time at the ground for any reaction. The
market may not rally daily once the initial euphoria dies down. Only
after the speculators calm down will there be a change. Spread your
investments. Multicap and mid-caps will benefit from the latest
announcements in the runup to Diwali. So, here’s spreading light
and good cheer. Happy Diwali in advance!