Should you be blaming Taper Tantrum 2.0 for making Nifty fragile?

Fortunately, India is not currently in a precarious position that it was during 2013 – when tapering was initiated by the Fed to normalize quantitative easing post the 2008 financial crisis. While India was listed under the ‘Fragile Five’ economies in 2013 as being one of the most vulnerable to the consequences of tapering, India now seems to be in a better shape to tackle the onslaught. The country’s foreign exchange reserves are more than 2x as compared to 2013 and stand at a record high of over $640 billion. Few other indicators determining financial vulnerability such as external debt as a percentage of GDP, consumer inflation and current account deficit also stand favorably when compared to 2013, signaling that India may not be fragile anymore.

As the probability of there being a conspicuous fall in the equity market due to the tapering is low, the lack of vitality can more so be attributed to profit booking. India has been one of the best performing emerging markets in this year and a slew of international brokerages have also been citing that Indian equities are expensive currently, leading to higher wariness among investors. This coupled with better opportunities in the primary markets and inflation worries appear to be the driving forces of hesitation in the secondary space. Having said that, investors need to be watchful once the Fed starts tapering, since short-term corrections can prevail as liquidity starts drying up.

Event of the week
Auto sector was in the limelight this week as expectations of normalization and a potential turnaround led Nifty Auto, which otherwise has been sluggish as compared to Nifty50, to rise 0.35% this week while Nifty50 declined by 1.87%. The management commentaries of a few auto-makers have also indicated that the worst of the semiconductor shortage is over and their future performance outlook seems better backed by unabated demand and the improving supply chain situation. While the optimism among the auto-makers seems reassuring, inflation may continue to hurt their margins. Therefore, investors may tactically place their bets in this sector on companies with strong earnings and margin visibility along with resilient balance sheets.

Technical Outlook
Nifty50 closed this week by posting a strong bearish candle. During the week, the index made an attempt to break above 18,120, but failed as selling pressure rose. Given that the breadth of the market is weak, it is likely that higher levels may not sustain. The benchmark index is now trading around its crucial support level of 17,700. Similarly, Bank Nifty is also trading around the rising trend line support. We suggest traders maintain a mild bearish to neutral outlook to position their trades. A break below 17,700 may lead the benchmark to test 17,500 levels.

Expectations for the week
As the result season is through, D-Street will look for cues from international factors to decide its movement. In the absence of any positive triggers, indices are expected to remain under pressure as the market has been embracing a ‘Sell on Rise’ mood. In the coming week as well, stock specific movements will be more prevalent than movements in the market as a whole. As global macros will continue to dominate, investors should observe FII activity to weigh the sentiment and adopt a selective approach rather than venturing in any aggressive trades. Nifty50 closed the week at 17,764.80, down by 1.87%.