Stock Market affected by Monsoons and Government Agenda

Markets were stirred by two events this week. At the start of the week, it was news about a revision in tobacco taxes under GST resulting in higher effective tax. The initial reaction was a gap down in tobacco stocks and some recovery the next day. The government admits it’s excel faux pas, but the final outcome is understandable since tobacco consumption is fairly price inelastic and socially undesirable, so a fall in tax incidence would have been counter intuitive.

At the end of the week, it was a big announcement by Reliance Jio to offer an ‘intelligent smart phone’ with data connectivity at zero ownership cost (initial deposit of USD 23 refundable after 3Y). After having crashed entry barriers for high-speed data, it’s inexpensive smart phone aims to bring digital services to the entire population within the next 12 months. Note that, tangible impact from Jio’s entry is already visible in macro statistics (GDP -> subscriber growth; import -> mobile phones). This is a big infrastructure leap for the country with implications for consumer behavior in the coming years.

Our initial feelers on GST suggest smooth implementation, though confusion on input tax rates and therefore final pricing is holding back decision on restocking and purchases. A gradual recovery in inventory demand should ensue in this quarter. On other news, inflation breached the RBI lower band of 2% in June and is expected to remain there for a while – when and how much is the only question remaining for RBI rate cuts.

Cumulative monsoon rains have closed the deficit (+1% vs. normal) that opened up last week, following stellar rains in the week ending 19 July (+11% vs. normal). Only two states (KA & TN) remain as potential pain points due to deficit rains, deficient reservoir levels and weak irrigation cover.

Watch out for

Weekly monsoon progress

RBI revealing the value of unaccounted cash post demonetization (end July). This could result in a bonus for the fiscal.

1st August Manufacturing PMI for broad data point on restocking demand post GST.