Markets Weekahead: RBI policy, earnings in focus

July 23, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Markets were in state of confusion last week as see-saw trading continued, but the benchmark index managed to post a weekly gain of 0.9 percent. Earlier in the week, Europe’s sovereign debt worries dampened sentiment, while weakness continued after Pranab Mukherjee said inflation is expected to remain high between August-December 2011.

Finally, on Friday, markets cheered the news of Greece’s second bailout package worth $157 billion.

Q1 results so far have been a mixed bag. Pressure on margins on account of increase in input prices, wages and interest rates was evident in earnings. Autos results have been more or less disappointing because growth is getting muted despite of discounts offered. NIMs for banks which have declared results so far have declined, however, profits have grown by a healthy ~20 pct y-o-y. Base rate system has helped the PSU banks at large in improving earnings.

We expect asset quality of some of the PSU banks to falter on account of system based recognition of NPAs. SBI’s q-o-q growth in profits will be good on account of a much lower base.

The way monsoon pans out in the coming months is crucial in shaping inflationary expectations. Monsoon so far has been making headway on expected lines. Historically, a good monsoon has been able to boost rural demand and has been instrumental in reducing raw material prices, aiding the overall economic growth of the country.

Early signs of monetary tightening are visible as growth has slowed in key sectors like auto, consumer durables and real estate. We can also deduce that we could be nearing the end of monetary tightening cycle as inflation subsides gradually. Having said that, we believe RBI is likely to increase policy rate by 25 bps in its policy setting meeting on Tuesday. Any indication from the RBI that the interest cycle has peaked will be a major positive for the markets.

Worries on fiscal side, however, continue on account of a mounting subsidy bill and revenue shortfall along with the impending divestments could lead to the GDP growth rates chipping off a bit.

Government policy decision making seems to back in action. After the Cairn-Vedanta deal, Reliance-BP deal has been cleared and decks have been set for the much awaited FDI in multi-brand retail. These are positive triggers for the markets in the coming week.

FMCG stocks are expected to see heightened activity as key FMCG companies ITC, HUL are expected to announce their Q1 results. Results of large caps like ONGC and Reliance Industries are also in the pipeline. These will be instrumental in dictating the market trend for the week. Among the prominent mid-cap firms, Titan, Glenmark, Asian Paints and Bank of India will also announce their earnings in the coming days. The week will also witness derivative contracts expiry which is expected to add to the volatility.

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