The narrative of rising dollar-higher inflation-rising interest rate continues.

Index CloseChange% Chg
NIFTY 50 15752 53+0.34%
NIFTY BANK33539 88-0.26%
Weekly percentage changes in Nifty and Bank Nifty.

Windfall Tax on oil

The government joined countries such as the United Kingdom and Hungary in imposing additional duties on oil companies in the form of a windfall tax on oil produced locally. On Friday, the government also raised the import duty on gold.

Though such a levy is non-inflationary and affects a few enterprises or segments, and it has no effect on consumers for their day-to-day needs.

However, this also shows how stable and predictable is the tax regime. As the oil companies may have utilised the increased profit to enhance their capital spending, instead of paying higher taxes as windfall tax.

On the other hand, this additional levy may not generate much revenue for the government because it would lower the dividend income from the state-owned oil companies. Moreover, the levy of windfall tax also sends a negative signal to the international investors.

Earlier, there have been reports that certain private oil companies have stopped or curtailed supply to their local retail outlets in order to capitalise on increased oil prices in the international market and diverted local supplies for exports.

If the government has imposed windfall tax to curb the practice of diverting oil supplies in the international market, then definitely this is a positive move.

Whatever the outcome or the reasons for the additional levies as a windfall tax, it has undoubtedly added more volatility to the already stretched conditions. As a result, on Friday, the share prices of Reliance Industries RIL were down about 7 per cent, ONGC down about 13 percent and Oil India down about 15 percent.

As noted in earlier blog; more curbs, rate hikes, export bans and duty exemptions announced to fight inflation. Is this enough to tame the inflation or is it too little too late? Similarly, strong demand and continued sanctions against Russia may keep crude prices high and volatile. And the high crude prices will affect the current account deficit and may keep the Indian Rupee under pressure.

Should you buy, sell or hold ?

During the week, unfavourable global market cues, rupee weakening, and selling in oil refineries stocks held back market advances. Further, manufacturing output growth PMI dropped to a nine-month low in June as rising inflation dampened demand. Further more, FII/FPI withdraw about Rs. 50,000 crores from the Indian equity market in June. For the ninth month in a row, FII/FPI have continued to sell off in the Indian equity market.

Windfall Tax effect, Nifty up marginally during the week. Renko chart shows downward trend to continue..
Nifty daily data – Renko Chart – the trend is downward

If you ignore all the noise and consider only the price actions, the picture becomes clearer, at least in the short term. Similar to the previous week, the above Renko chart currently has a negative bias and is trending downward.

Market – Weekly Update – Windfall Tax

During the week, the Nifty closed marginally in the red while the Bank Nifty closed marginally in the green. Similarly, the broader market saw minor increases. Further more, the Nifty Midcap 50 gained 0.56 percent and the Small cap 50 gained 0.65% over the week.

Windfall Tax effect, Nifty up marginally during the week. Nifty weekly data chart and hanging man candlestick pattern formation.
Nifty weekly data – Hanging Man Candlestick Pattern

Structurally, nothing major changed during the week. The concerns of the previous weeks remain as is, which are:

  • Geopolitical- Russia Ukraine War 
  • Rising Inflation
  • US Fed and RBI tightening policy
  • Rising Interest Rates 
  • FII selling from Emerging Markets
  • Rising US Dollar

Nifty Market breadth and Volatility

During the week, the market breadth was favourable, with a weekly advance-decline ratio of 1.06. Nonetheless, it is lower than the previous week’s figure of 1.22. The volatility index India Vix, on the other hand, surged 3.41 percent to close at 21.25.

Top Gainers and Losers of the Week

The top gainers in the Nifty 50 were ITC (+6.77%), Hindalco (+5.90%), Larsen & Toubro (+5.15%), UltraTech Cement (+4.10%) and Coal India (+3.39%).

The top losers in the Nifty 50 were IOC (-31.19%), Bajaj-Auto (-4.93%), Titan (-4.89%), ONGC (-4.38%) and Reliance (-3.64%).

Nifty Sectors and Broader Indices

Metal +2.17%
Oil and Gas -0.62%
IT +1.03%
Auto +1.11%

FMCG +2.51%
Consumer Durables -1.21%

Looking forward

Previously, the Nifty broke through the 15800 – 16800 level box on the downside, and 15800 is a significant resistance. For the last three trading sessions, the Nifty has closed below 15800, which is now a critical hurdle to overcome before initiating an upward directional move.

Further, the Nifty is trading below its 20-day, 50-day, and 200-day simple moving averages. Further more, the formation of Hanging man candle stick pattern during the previous week shows a lack of strength in the trend.

Nifty Weekly Pivots

S2 S1 R1 R2
Pivots are calculated using the weekly data.

As per the above pivots data, 15550 to 15950 is the Nifty 50 trading range for the next week. The support is around the 15350 level, and then around 15000 level. If the market breaks the 15000 level, such a break can drag the Nifty down to 14750 or below levels in the short term. And on the upside, we might again see selling around 15800 – 15900 level.

The markets are forward-looking, and the possibility of missing the budget deficit target, high inflation and downgrade to GDP growth estimates are causing nervousness in the market. There is a possibility that the fiscal measures implemented may take longer to produce the expected benefits. Further, the inflation might stay sturdy a little longer than expected.

The current consolidation phase may continue for a little longer, though there might be some relief rallies in between. Wait until the market has fully priced in the global downturn’s impact and favourable indicators arrive on the horizon. Trade only with a well-defined plan and a proper stop loss setup.

Read our earlier blogs here.
Buy, Sell or Hold?
Is this the beginning of a new economic cycle?
How does the rising dollar impact you?

This article is only for educational purposes and is not an investment advice. Please consult with your investment advisor before investing.

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