India Market Weekahead: Time to take profits but increase exposure on correction

January 29, 2012

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

The markets extended a winning streak and gained 3 pct during the week driven by strong inflows from foreign institutional investors, a decent set of quarterly numbers from key companies, positive news flows on the policy front and the RBI decision to cut cash reserve ratio (CRR) by 50 basis points.

The RBI surprised the street with the quantum of CRR cut and left its policy rates unchanged in line with expectations. The cut, the first since 2009, is expected to infuse 320 billion rupees into the system and ease the tight liquidity situation. On the policy rate front, we feel it is still premature to begin reducing rates as reduction will be determined by sustained signs of inflation moderation. Secondly, the RBI governor wouldn’t like to give a signal that he’s acting in a hurry and playing to the gallery. A repo rate cut in the March policy review seems unlikely and we expect the start of the rate cut cycle from the following policy review.

Interest rate sensitive sectors such as banking, auto, infrastructure and real estate have already rallied significantly and most of these stocks seem to be overbought considering a 25 pct – 30 pct rally in some of the large cap counters and some mid caps have returned more than 40 pct from December levels. Substantial gains from hereon seem unlikely and we may see a bout of profit-taking.

The rupee gained further during the week, maintaining a solid undertone and challenging resistance levels just beyond 50 rupees against the dollar. Firm risk appetite underpinned confidence in the currency. However, substantial gains beyond 49-rupee levels do not seem likely immediately. But we are bullish on the rupee over a longer term of 5-6 months wherein we could see the rupee back at 45 per dollar.

For the coming week, stock-specific activity is expected to continue with Q3 earnings season at its peak. Some key results are LIC Housing, ICICI Bank, Punjab National Bank, Dabur, ONGC, Dr. Reddy’s, PFC and HPCL. Auto and cement stocks will be in focus as companies from these sectors will unveil their monthly sales data for January from Wednesday. The Reliance Industries share buyback programme is expected to begin on Wednesday which is expected to keep the stock in the limelight.

Focus is shifting to politics with assembly elections in Manipur, Uttarakhand and Punjab while the seven-phase polling for Uttar Pradesh kicks off on February 4.

On the global front, it will be a data-packed week in the U.S. with housing, manufacturing, jobless claim and non-farm payroll data coming up.

Markets have seen a dream run so far this year with Nifty touching 5200 levels. It would be wise to take some profits off the table as markets have run up too fast in a short span of time. I expect a correction of 300-400 points in the Nifty in the coming weeks as markets would need a huge trigger to take it beyond the crucial resistance levels of 5200-5250. With most news flows and results already factored in, the time gap between now and the next trigger, which could either be the elections and the political re-alignment post that or the budget, could be a period of correction and consolidation.

The sentiment clearly seems to have turned around and the risk appetite for emerging markets has suddenly surfaced. Hence, the correction would provide a buying opportunity to those who missed this rally.

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