India Market Weekahead: RBI policy holds the key

January 22, 2012

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

Markets extended a rally for the third consecutive week led by strong FII inflows. FIIs have pumped in $1.2 billion so far this year as risk sentiment stabilised after several European debt auctions saw lower borrowing rates and overwhelming demand. Improvement in U.S. economic data, rupee appreciation and December quarter earnings exceeding lower expectations helped the market rally nearly 8 pct in three weeks.

The initial set of corporate results surprised the street as HDFC Bank, Axis Bank, Wipro, TCS, HCL Technologies and Hero MotoCorp posted better-than-expected numbers.

However, Reliance Industries (RIL) disappointed with a net profit de-growth of 13.6 pct year-on-year on the back of lower refining and petrochem margins. Its gross refining margins declined sharply to $6.8 per barrel from $9 per barrel. The buyback of $2 billion at a maximum price up to 870 rupees/share for up to 120 million shares or 3.6 pct equity via open market is seen as a cover-up for the subdued results. RIL stock has already gained 8 pct during the week after the announcement of the buy-back program. We may see a knee-jerk reaction to the results when trading opens on Monday but the buy-back may provide a cushion at the lower end.

As expected, shares of power generation companies gained after Prime Minister Manmohan Singh pledged help on chronic power shortages in the country in its meeting with business leaders. Our top pick Tata Power jumped 9 pct while NTPC gained 5 pct. Any action at the ground level will lend a helping hand to other sectors such as banking where there is a fear of NPAs from the power sector as well as capital goods which has seen a slowdown in order flows.

The rupee maintained a stronger tone during the week and strengthened to near 50 levels against the dollar. Sustained net inflows so far in 2012 along with short covering helped strengthen the rupee. It may be difficult for the rupee to extend the recovery further in the near term and we expected consolidation at current levels.

The coming week is truncated on account of Republic Day on January 26. We have the all important quarter review of monetary policy on January 24. The Reserve Bank of India (RBI) is widely expected to keep its key lending rate — the repo rate — steady. However, a few sections of the market are expecting a CRR cut.

The Vodafone verdict is a big booster for cross-border deals and will go a long way in improving sentiment about investing in India. This is one more in a long list of positive cues from the beginning of this New Year.

Stock-specific activity is expected to continue with the next set of December quarter results this week. Some prominent names declaring numbers are L&T, Grasim, Lupin, Colgate, Cairn India, Biocon, NTPC, Ultratech, Gail and Maruti. We also have the derivative contract expiry this week which is expected to keep markets volatile.

On the global front, the Federal Open Market Committee (FOMC) holds a meeting on U.S. interest rates on January 24, 25. The Fed is expected to keep rates unchanged. Cues from Asian bourses will be limited as the Chinese markets are closed for the entire week, while Hong Kong bourses are shut from Monday to Wednesday for Lunar New Year holidays.

The recent rally is largely due to the return of risk appetite among global investors on account of strengthening rupee and easing concerns over inflation and economic growth. With inflation on a rapid decline, the RBI will have more headroom to cut rates in future, which will be a big boost to the Indian markets. However, the Nifty could see some weakness in the coming week as it approaches 5100 levels which appear to be a key resistance and we could see profit booking. Any disappointment in the monetary policy could fuel a correction.

Underperformers of 2011 have started to see renewed buying interest by institutional investors. Capital goods, power, metal and real estate stocks have gained significantly so far this year. Beaten down names like L&T, Tata Steel, DLF and SBI have seen a rally of 8-10 pct during the week. The mood is changing from “Sell on Rallies” to “Buy on Dips” and we do see sentiments at the ground level much better than in December. Continue to top up your portfolio on declines.

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