Sensex down 400 points: 4 key factors that will steer markets this week

Benchmark indices lost nearly 3% last week on caution that Union Budget could push up inflation and prompt the central bank to raise interest rates soon. That apart, imposition of long-term capital gains tax, through grandfathered till January 31, 2018, also spooked investors.

Finance Minister Arun Jaitley, delivering his last full annual budget before a general election to be held by May next year, raised government spending for rural areas and support to farmers, while slowing the pace of fiscal consolidation.

A cautious stance at the RBI would increase the probability of interest rate increases in the coming fiscal year. 

The sell-off on Friday post imposition of long-term capital gains (LTCG) tax at 10 per cent, dividend distribution tax on equity oriented mutual funds, higher-than-expected fiscal deficit target for FY18 & FY18, likely increase in interest rates and global weakness amid rising bond yields in the US dampened investor sentiment in the week gone by.

Mid and smallcaps, which rallied 48% and 60% in 2017, were hit very hard, losing nearly 9% and 8% during the week, respectively. The 30-share BSE Sensex plunged 983 points to close the week at 35,066, which include Friday's 840-point or 2.33% loss. The 50-share NSE Nifty ended the week at 10,760, down 309 points or 2.79%.

Key things to watch out for this week:

RBI Policy

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) is slated to meet on February 6 and 7, with its decision due on Feb 7. This will be the sixth bi-monthly monetary policy meet of FY18. 

Analysts largely expect status quo on policy rates but the commentary to be hawkish, may indicate rate hike than cut.

Budget spillover

Markets will continue to react to Budget 2018. The last week’s budget proposals of 10% long-term capital gains (LTCG) tax on equities and overshooting of fiscal deficit target quashed investor optimism, leading to a massive rout on bourses.

Macro Data

Nikkei Services PMI for January month for will be released on Monday. In December, Services PMI improved to 50.9 from 48.5 in November, signalling a renewed increase in activity.

Earnings

Although we are at the fag end of the earnings season, many PSU companies and many Tata firms are yet to announce their quarterly numbers.

Nearly 1,000 companies will declare their October-December quarter earnings in the coming week, which include major names - State Bank of India, Tata Motors, M&M, Lupin, Punjab National Bank, Hero MotoCorp, Siemens, Cipla, Aurobindo Pharma, Eicher Motors, BHEL, Bank of Baroda, Tata Steel, ONGC, HPCL, BPCL, ACC, Bosch and Coal India.
 

Global Cues

US will announce its Services and Manufacturing PMI for January on Monday and initial jobless claims on Thursday. 

Europe's Services PMI for January will be released on Monday and Retail PMI on Tuesday.