D-Street eyes RBI, US Fed meets

Indian shares are likely to continue their downtrend ahead of the Reserve Bank of India (RBI) and the US Federal Reserve’s meet next week.

Market participants said expectations of a rise in interest rates by RBI and Fed comments on its stimulus programme were likely to keep the market nervous in the week ahead, which will also see the issue of the wholesale price inflation figures.

“Based on the data coming from the US, markets expect tapering of the Fed’s stimulus programme to start sooner than later. If the Fed announces this could start in January itself, that would be a big negative for the markets,” said Dipen Shah, senior vice-president (research), Kotak Securities.

The Fed will hold its two-day Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday, followed by a press conference by Fed Chairman Ben Bernanke. The US central bank is expected to decide a timeline for the dialling back of its stimulus package, termed Quantitative Easing-3.

The signs of improvement in US economic data could see the Fed announcing a withdrawal or a reduction in its $85-billion bond-buying programme at the FOMC meet.

The markets are also nervously awaiting RBI’s mid-quarter policy review meeting on Wednesday. A 25-basis point rate hike has already been discounted for by the markets. Participants said the strong inflation and weak industrial production numbers, issued on Thursday for November and October, respectively, could prompt the central bank to raise rates by 50 basis points.

“If that happens, there could be a sharp reaction in the market. But we are hoping RBI would look at the recent spike in inflation as a one-off event and take into account the recent correction in vegetable prices, the main cause for the sharp rise in CPI (consumer price index),”said Shah.

Last week, RBI Governor Raghuram Rajan said the central bank was “uncomfortable” with the CPI figures, which came in at 11.24 per cent, much higher than the market expectations. Sources said if the wholesale inflation numbers, to be released on Monday, were also stronger than expected, it could further dampen the market sentiment.

Shares ended the week down by about four per cent on Friday, the highest weekly decline in nearly a month. The markets retraced most of the gains made since the gap-up opening on Monday, bolstered by a BJP clean-sweep in three of the four Assembly election results announced on December 8. The BSE Sensex declined 3.3 per cent through the week to close at 20,715. The NSE Nifty ended the week down 3.8 per cent at 6,168.

However, analysts said markets would find support around the 6,000 levels. “The overall outlook continues to be bearish and we expect the Nifty to test the 6,000-mark. If it falls to 5,970, there could be further severe correction,” said Shardul V Kulkarni, senior technical analyst with Angel Broking.

On the upside, analysts said the Nifty could find resistance around 6,200-6,300 in the absence of any further positive triggers in the market.

According to them, stocks of sectors such as automobile and banking are likely to put downward pressure on the market, as the performance of these stocks is linked to interest rates.

Flows from foreign institutional investors (FIIs) could see some decline in the week ahead, said participants, as December was perceived to be the holiday season for foreign investors. Since the beginning of the month, FIIs have been net buyers of equities at Rs 7,016 crore (Rs 70.16 billion), while domestic institutions have been net sellers of equities at Rs 5,801 crore (Rs 58.01 billion). FIIs were, however, net sellers of equities on Friday, owing to the poor inflation and industrial production data released on Thursday.