Ripple Effects Of GDP Contraction To Take More Time To Dissipate: Analysts

"In spite of the impact of lockdowns, if negative growth starts to come down, that itself is positive," said AK Prabhakar, head of research at IDBI Capital in Mumbai.

Ripple Effects Of GDP Contraction To Take More Time To Dissipate: Analysts

Domestic stock markets lost steam on Friday, a day after benchmark indices jumped 1 per cent, as caution prevailed ahead of the release of official data on the country's gross domestic product (GDP), after the economy suffered its worst quarterly contraction on record in April-June. The government is widely expected to report a contraction in the July-September period, which, if true, would be the country's first technical recession — or two consecutive quarters of contraction in GDP — since 1996, when it began quarterly records.

Data will be out at 5:30 pm. 

Since the last official GDP report, released on August 31, which showed the economy crashed a record 23.9 per cent in the first quarter of current financial year, the equity benchmark Nifty 50 has risen 1,599.50 points, or 14.05 per cent, as of Thursday's close. 

Analysts say the current rally in the markets is propelled by liquidity, and therefore despite Friday's data set confirming a technical recession in Asia's third largest economy, the markets will bear a limited impact.

"The financial companies have taken a hit and their damage is not yet estimated, so it is a liquidity-driven rally which has seen a disconnect between valuations and stock prices," KR Choksey Securities' Hemen Kapadia told NDTV.

"So it could be some more time before reality sets in... So, succinctly put, overheated markets have taken everything in their stride."

Some say the markets have already factored in a rebound in business and economic activities, following months of COVID-19-caused slowdown.

Most large caps reported stronger earnings for the quarter ended September, in line with gradual removal of strict restrictions imposed in late-March to tackle surging infections. 

According to a poll of economists by news agency Reuters, the country's GDP is likely to have contracted 8.8 per cent in the quarter ended September 30.

They also predict a contraction of 3 per cent in the December quarter, followed by expansion of 0.5 per cent in the final January-March period of financial year 2020-21.

(Also Read: At -23.9%, GDP Contracts At Its Steepest Pace On Record)

"In spite of the impact of lockdowns, if negative growth starts to come down, that itself is positive... If GDP contraction is worse than 15 per cent in the September quarter, it can lead to 1-2 days of correction... In my view, anything better than 10 per cent, be it 8 or 9 per cent, is going to be positive for the markets," AK Prabhakar, head of research at IDBI Capital Markets, told NDTV. 

Anything Better Than 8% "Very, Very Positive"

"The markets are zooming, so the impact of latest GDP figures is going to be very low. Anything better than 8 per cent is going to be very very positive," Mr Prabhakar said.  

The Nifty has bounced back a strong 72.90 per cent since the lowest level recorded this year, a slump triggered by the imposition of lockdown, which sent an already-slowing economy into a tailspin. 

Having broken a series of records in past few trading sessions, the 50-scrip benchmark index is on course to clock its second best monthly performance so far this year, following a 14.7 per cent spike in April.

Strong foreign institutional inflows amid optimism on the COVID-19 vaccine front is driving the rally, say analysts. 

"Good auto sales, agri-production and online consumption is showing improvement. India will have current account surplus this year. Foreign institutional investors have pumped in big money in November," Anita Gandhi, director, Arihant Capital Markets, told NDTV. 

"Easing of GDP contraction is going to support market sentiment further. However, any number below estimates may lead to disappointment," she added. 

"The Worst Is Behind"

"Markets are anticipating that the worst of contraction is behind us but the ripple effects of which will take some more time to dissipate," said KR Choksey's Mr Kapadia.