Investors are looking to consolidate their positions in Indian shares as they pause for breath after the market notched five consecutive weekly gains and a series of record highs. A correction in share prices is in order, and cash-flush funds are waiting in the wings to grab the opportunity to expand their portfolio or get a foothold in the fast growing economy.

Last Wednesday’s 25 basis points reduction in the repo rate by the Reserve Bank of India, taking it to a 6-1/2 year low of six per cent, was in line with market expectation. With retail inflation expected to stay below the central bank’s threshold, the markets should begin to start discounting for another cut in rates in the December quarter.

Lower borrowing costs are expected to help lift sluggish manufacturing off the ground, and accelerate an earnings rebound in the coming quarters.

“Correction is required for a healthy trend, but currently there is a bullish atmosphere everywhere,” Raamdeo Agrawal, joint managing director of Motilal Oswal Financial Services, told the Economic Times. “Optimism is at its peak, foreign and domestic fund flows are very good, some of the leaders of the sectors are doing very well.”

Agrawal, who adores Warren Buffett and has been attending the annual general meeting of the famed US investor’s Berskshire Hathaway, said there was a “definite confidence” among investors that earnings growth would come any time.

“There is a huge pile of cash in the system waiting to be deployed that will act as a shock absorber at every weakness. Barring any global event, the outlook is positive.”

Strong resilience

Factory activity in July plummeted to its lowest in more than nine years as businesses grappled with the intricacies of a new national sales tax that was launched at the start of the month. The Nikkei/IHS Markit Manufacturing Purchasing Managers’ Index fell to 47.9 in July from 50.9 a month earlier, its first contraction since last December and the lowest reading since February 2009.

“Private sector activity dipped for the first time since the demonetisation shock,” Pollyanna De Lima, principal economist at IHS Markit, said in a report. “Most of the contraction was attributed to the implementation of the goods and services tax and the confusion it caused.”

Investors took the data in their stride, confident that the new uniform tax that replaced multiple levies across the country would considerably boost the economy as well as improve tax compliance, and drove the market higher showing they were firmly focused on the longer term benefit.

The top-30 Sensex shot to an all-time high of 32,686.48, and closed at 32,325.41 as profit-taking clipped gains for the week. Similarly, the 50-share Nifty soared to a record 10,137.85 and ended at 10,066.40, up 0.5 per cent for the week.

Undoubtedly, the market needs to consolidate after the Nifty gained 23 per cent in 2017 and the Sensex rose 21.4 per cent, but the undercurrent remains staunchly bullish.

“About 10-20 per cent correction is possible and will happen any time. In equity markets, downturns are temporary but upsides are permanent,” Agrawal said.

Maruti Suzuki, the country’s biggest car maker, said its domestic sales in July jumped 22.4 per cent from the same month a year earlier, indicating that the new national sales tax had no impact on its operations. Its shares rose 2 per cent over the week.

Foreign portfolio flows into Indian equity are edging towards $9 billion this year, and the appetite is set to grow on the back of lower interest rates that should aid earnings recovery.

Overseas demand for Indian debt is voracious, with more than $21 billion already coming in 2017. According to Bloomberg data, foreigners raised holdings of government and corporate bonds by Rs166 billion in July, a sixth month of inflows.

Securities house Nomura said in a report that foreign direct investment in India would triple to $126 billion a year by 2025. Infrastructure, banks, e-commerce, hospitals, retail, automobile, pharmaceuticals and diagnostics are the sectors that should benefit, it said.

Cochin Shipyard

The overwhelming response to an initial public offering of shares by state-owned Cochin Shipyard during the week was an indicator of the strong appetite for Indian companies. The sale of 10 per cent holding in the builder of defence and commercial ships to raise up to Rs14.68 billion was subscribed more than 76 times, according to provisional data.

The company, which also has one of the biggest ship repair facilities in India, offered shares in a price band of Rs424-432 each. It aims to use the proceeds from the sale to build a new manufacturing facility.

The smooth sail for the offering should embolden the government to go ahead with more divestments. On Friday, New Delhi issued a notice inviting proposals to sell up to 25 per cent in Mazagon Dock Ltd, Bharat Dynamics Ltd, Garden Reach Shipbuilders & Engineers Ltd and Mishra Dhatu Nigam Ltd.

The government has budgeted to raise Rs725 billion through divestments in 2017-18, and it managed only Rs93 billion in the first four months of the financial year, Finance Minister Arun Jaitley said.

New Delhi has set up a new exchange-traded fund to sell government stakes in 22 state-run and private firms. Through the fund the authorities will sell shares in utilities like Power Grid Corp, NTPC, Gail, NHPC, Neyveli Lignite Corp and SJVN. The fund will also sell government stakes in ITC and National Aluminium Company.

The writer is a journalist based in India.