India’s largest pension fund is expected to make its first investment in the stock market in the coming week, and this should provide a major impetus to investor sentiment that has been wavering. The central bank, which is scheduled to review monetary policy on Tuesday, is set to maintain status quo with food inflation still a concern.

The Employees’ Provident Fund Organisation sits on assets worth more than $100 billion (Dh360 billion), one of the world’s largest, but the state-controlled fund manager has shied away from the stock market and kept most of its corpus in government securities that give a pittance in returns. The EPFO is now under increasing pressure to improve the returns to its 80 million members and has decided to invest a small part of its cash in exchange-traded funds.

“We could see the EPFO making its first-ever entry into the stock market on Thursday,” said equity salesman Mehul Patel. “Even if it’s a token gesture, the mere presence of a large institution would be a big morale booster.”

State-run Life Insurance Corp has been the biggest domestic investor in stocks, while the Unit Trust of India and other institutions have a far less impact on the markets compared with their clout before the country opened up to foreign funds more than two decades ago.

Patel said the EPFO is unlikely to be an aggressive bidder, but with its access to large funds the EPFO can become a decisive player.

Game-changer

For the stock market, this could prove to be a game-changer. Foreign funds have moved about $900 million into Indian stocks in July, the most in Asian markets, as tumbling Chinese stocks rattled bourses in the region, particularly those that rely on exports to drive their economies.

Despite hiccups the top-30 Sensex and the 50-share Nifty closed with a monthly gain of 1.2 per cent and 2 per cent respectively, while China’s Shanghai Composite Index plunged 15 per cent in July as Beijing’s massive cash-injection failed to douse investor fears about a slowing Chinese economy, debt-ridden banks and valuation concerns.

China’s economic problems make India look a bright spot for foreign funds, but there are nagging issues within India that needs to be addressed for growth to pick up.

“Although we believe recent market gyrations in China may be a marginal positive for India, continuing worries on earnings, the monsoon and the news flow around key legislation especially the GST [goods and services tax] will likely keep flows volatile,” equity strategists Jitendra Sriram and Vikas Ahuja and HSBC Securities and Capital Markets (India) Private Limited said in a recent note to their clients.

India’s cabinet this week approved a GST bill that incorporated recommendations from a multiparty parliamentary panel, raising hopes that lawmakers would give the go-ahead for the biggest tax reform aimed at tearing down barriers within the country. The central bill will replace multiple taxes by states and ensure better compliance and easier norms for businesses.

On Friday, Finance Minister Arun Jaitley sought parliament approval for additional expenditure of $4 billion (Dh14.6 billion) for the current financial year, half of which would go to capital infusion in state-controlled banks. The move is aimed at helping state banks that are facing a liquidity crunch — caused mainly by loan defaults as the slow pace of recovery spoiled business plans of borrowers — and would pave the way for increased credit offtakes.

As about 70 per cent of all loans and deposits in India are controlled by state-run banks, the capital injection could provide the catalyst to boost production.

Rates on hold

The big event in the coming week is the Reserve Bank of India’s monetary policy meeting on Tuesday, and the consensus is that the central bank will stay pat on rates.

Pranjul Bhandari and Prithviraj Srinivas, economists at HSBC, said the RBI’s decision was contingent on developments on a variety of fronts, each of which are in a confounding state of disequilibrium.

“Rains remain erratic and food prices spiked in June, though prices have eased in July. Growth recovery indicators provide mixed signals, global commodity prices have fallen again after a momentary rise, monetary transmission remains incomplete, and the timing of the Fed’s lift-off depends on incoming data. In light of these unclear trends and unfolding data, we expect the RBI to remain on hold on 4 August and reiterate its data-dependent stance,” they wrote in a report.

The central bank has cut its main policy rate, the repo rate, thrice since January 15 by a total of 75 basis points, but commercial banks have been reticent to pass on the full benefits burdened by non-performing loans and high cost of deposits. The RBI will again stress the need for the better transmission of its policy.

ICICI Bank, the country’s biggest private-sector lender, rallied nearly 4 per cent on Friday after it beat market expectations with a June quarter net profit of Rs29.8 billion.

However, engineering and construction conglomerate Larsen & Toubro Ltd could face a sell-off on Monday after the company reported a more than third drop in quarterly profit after the market closed on Friday.

Bharti Infratel

Morgan Stanley’s analyst Vinay Jaising believes that Bharti Infratel is “best positioned to benefit from data growth in the Indian telecom market as operators roll out services and expand their 3G coverage.

“Earnings have little downside because it has long-term contracts with parent Bharti Airtel and other operators,” he wrote in a report, adding that return on equity should increase to 18.5 per cent in 2017 from 11.4 per cent in 2015.

Bharti Infratel is India’s most profitable listed tower company with more than 80,000 towers and over 150,000 tenants. Its shares closed at Rs447.95 on the BSE, well off its year-high of Rs505 on May 29.

Meanwhile Credit Suisse, which has reduced India from one per cent overweight to one per cent underweight, has stuck with Axis Bank and HCL Technologies as their top picks.

The two most overvalued sectors are staples and health care, analysts Sakthi Siva and Kin Nang Chik said in a report, and both are seeing downgrades to consensus EPS.

The writer is a journalist based in India