Markets wary, all eyes on RBI meet

Any change in rates would mean more volatility; else, poll outcome-fuelled rally expected to continue.

Any move by the Reserve Bank of India (RBI) to change key policy rates could push up equity market volatility in the week ahead.

On Tuesday, the central bank is expected to meet to decide the direction of interest rates, an event watched keenly by markets for its outlook on growth and inflationary trends. With core inflation having moderated significantly, participants expect it to neither raise nor lower the rates; this has been already factored in by the markets. Any change in this would result in a sharp move, say experts.

“Prices in the bond and equity market reflect a ‘no change in rates’ policy by RBI. We do not expect RBI to change rates because of the continuation of foreign flows and the expectations built around the election outcome,” said Swapnil Pawar, chief investment officer, Karvy Capital.

In the absence of a surprise from the central bank, analysts expect the rally in the domestic markets to continue, with benchmark indices expected to scale new highs. Shares have been rallying since the beginning of the year, on the hope that the Bharatiya Janata Party, led by Narendra Modi who is perceived to be more business-friendly, will come to power after the April-May elections.

So far this year, the benchmark indices on the two major stock exchanges, Sensex (BSE) and Nifty (National Stock Exchange), have gained six per cent each. Last week, they were on a record-setting spree, with all-time highs breached on three trading sessions in succession.

On Friday, the Sensex ended the week at 22,339, up 2.6 per cent. The Nifty closed at 6,695, up 3.1 per cent from the previous week.

Ahead
For the week ahead, analysts said the Nifty was unlikely to fall below the 6,500-levels. “There has been a shift from 6,400 to 6,500-6,600 puts. This suggests confidence in the market direction. The Nifty is likely to stay above 6,500 and not go down to 6,400-levels in the near future,” said Ashish Chaturmohta, head (technical and derivatives analysis), Fortune Equity Brokers.

The 6,580-level would be a key support for the Nifty, say analysts. A fall below this should present buying opportunities. On the upside, the Nifty is expected to inch closer to the 6,800-levels.

The recent rally in the market has come on the back of continued foreign institutional investor (FII) flows. These entities have been betting heavily on India. Among all the emerging markets (EM), FII exposure to India has gone up significantly. Te other econ-omies in the EM basket remain under pressure due to weakening currencies and poor growth prospects.

The rupee currency has also appreciated, aiding capital flows to find its way into India. “The currency has moved from 64-65 (to the dollar) to back to 58-levels. FIIs are now getting the dual benefits of currency appreciation and higher returns from the Indian equity markets,” said V Balasubramanian, head (equity) and fund manager, IDBI Asset Management.

So far this year, the rupee has appreciated 3.1 per cent. It is now 59.89 to the dollar.

FIIs were net buyers of equities last week, at Rs 7,562 crore (Rs 75.62 billion). So far this year, they have pumped in Rs 23,284 crore as net buyers.

Before, the RBI policy decision on Tuesday, the government is expected to release the fiscal deficit numbers. Later in the week, on Thursday, the HSBC purchasing managers’ index data for the manufacturing and services sectors would be released. However, analysts do not expect these to have a significant impact on the market, unless the numbers surprise in either direction.

“RBI policy and the elections are what matter in a big way. Unless these data points are extremely bad or poor, the markets will not react, as these numbers have already been priced in,” said Balasubramanian.

Scrips
Analysts said banking sector stocks, mainly the state-owned banks, could be in focus ahead of the RBI policy. The Bank Nifty touched 12,754 on Friday, up 5.4 per cent through the week. Market watchers said the rally in banks would continue, as valuations remain low and attractive. ICICI, Punjab National, State Bank of India and Axis are among stocks to watch, said analysts.

Other state-owned company stocks of the infrastructure, power and oil and gas sectors — such as Oil and Natural Gas Corporation, Engineers India, Rural Electricfication Corporation and Power Finance Corporation — are being keenly watched. So are some private sector names, such as Tata Power, JSW Energy and Larsen & Toubro.

Most sectors are likely to continue rising, analysts said, expect those in information technology and health care. The rupee appreciation, with high valuations, has made investors wary here, say experts.

On the global front, investors are likely to watch for the US employment data to be released on Friday. It would help determine that economy’s pick-up. This would have a bearing on the American central bank’s stance on the tapering of the stimulus package which has been influencing the currency and equity markets movement in the EMs.