Rate-sensitive banking, automobile stocks to remain the most affected ahead of RBI policy.
The stock market is likely to remain volatile ahead of the Reserve Bank of India's (RBI's) policy review on Tuesday, when it is expected to cut interest rates by a quarter of a percentage point.
The market has risen over three per cent this month in anticipation of a rate cut by the central bank to bolster economic recovery.
On Friday, the Sensex rose around 320 points to close at 27,828 as investors lapped shares of interest rate-sensitive banking and automobile stocks.
The Nifty ended at 8,433, closer to the psychological 8,500, which analysts say is a key resistance.
The benchmark indices climbed three per cent in May. So far this year, they have gained about one per cent.
"Everyone has factored in a 25 basis points (bps) cut in interest rates. While we are bullish on an interest rate easing cycle, we do not expect the RBI commentary to be dovish at this point," said Gautam Chhaochharia, head of research (India), UBS.
A cut of 50 bps by RBI has been ruled out by experts. They expect it to maintain caution because of the rupee movement and worries about inflation.
"It will take time for RBI commentary to turn dovish because it has to manage inflation expectations," said Chhaochharia.
The case for a rate cut is strengthened by the 7.5 per cent growth of gross domestic product in the March quarter. Analysts said the market could also take positive cues from this number.
"Going into next week, the market will react to the GDP data (issued after market lows on Friday).
Friday's gains were supported by huge cash market volumes, with the provisional figure for foreign institutional investors (FIIs) coming in at a net buy of about Rs 2,300 crore (Rs 23 billion), the first encouraging action by FIIs since mid-April," said Hitesh Agrawal, head of research, Reliance Securities.
No rate cut announcement by RBI could see the market take a serious tumble. Further, the recent sharp rises have made many in the market nervous about the possibility of a further upside.
"The market will correct a little if RBI does not cut interest rates."
"Banks and other interest-rate sensitive stocks had run up sharply, expecting a rate cut. To that extent, there will be some disappointment," said Vikas Khemani, president and co-head, wholesale capital markets, Edelweiss. The Bank Nifty has gained about two per cent in May.
Experts said they preferred private banks, as prospects of growth looked better in these stocks. However, public sector banks were preferred for their attractive valuations, they said.
The other interest rate-sensitive sector, automobiles, will also be in focus on account of the monthly sales data in the week ahead.
This month, the Auto index has risen by about four per cent. Foreign portfolio investors (FPIs) are expected to continue as net sellers of Indian equities, as concerns about the payment crisis in Europe and an interest rate rise in the US compel them to move money away from emerging markets. However, domestic institutions are still going strong as buyers of Indian equities.
In May FPIs were net sellers at about Rs 3,655 crore, including provisional data for Friday from the exchanges. Domestic institutional investors have been net buyers at Rs 11,043 crore for the month.
"Domestic institutions have taken to the market in a big way but FPIs look like they will continue to sell.
But the positions that have been created in the market are very light, which means there is potential for the market to move up in a big way," said V Balasubramanian, head of equity, IDBI Mutual Fund. Analysts expect the Nifty to trade in the 8,300-8,600 range in the week ahead.
The upside is capped at 8,550. Downside resistance could be seen at 8,394.
"Broadly, our view is intact that sustainability above 8,500 in the Nifty would be decisive for the market to regain some upside momentum. Otherwise, profit taking will resume," said Jayant Manglik, president, retail distribution, Religare Securities.
