India Markets Weekahead: RBI monetary policy, quarterly earnings in focus

April 15, 2012

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

Nifty moved in the narrow range of 5,200-5,300 for the entire week and closed near the lower end, down 2 percent. Decline in industrial production (IIP), weak global markets along with tsunami fears in the Asian region dampened the investor sentiment.

March 2012 quarter result season took off on a pathetic note after Infosys results came in sharply below street expectations but in line with the our weak estimates.

However, the cracker came in from the weak guidance of 8-10 percent revenue (USD terms) growth for FY13. The management also warned of an uncertain macro environment and cautious spending patterns of clients.

Although the stock has already corrected 13 percent post the results, we do not see any major upside trigger for the stock in the near term. The best seems to be behind Infosys and the guidance will result in re-rating of the company.

IIP for February 2012 rose by a smaller-than-expected 4.1 percent, with the government also sharply revising downward the growth numbers for January 2012 to 1.14 percent from 6.8 percent citing wrong data inputs. However, this is not the first time that the government agencies have reported incorrect data. One may recollect that in December 2011, export data for April-October period were overstated by as much as $8.8 billion. Such errors in reporting key macro data has further dented the government’s image which is already reeling under severe criticism due to various scams and policy paralysis.

With poor IIP data, there is an increased speculation that the Reserve Bank of India (RBI) may have to cut rates by at least 25 basis points this month to boost confidence.

However, we believe it is not going to be an easy task for the RBI to reduce rates especially when WPI inflation is still not within its comfort zone. Brent crude oil price, though corrected marginally, is still hovering near $120 a barrel. Upside risks to inflation remain high if oil marketing companies finally increase fuel prices. On the contrary, if they don’t, we face a higher than manageable subsidy burden and its consequences.

Disappointing Chinese economic data and renewed concerns over Spain’s rising borrowing costs dragged the U.S. indices over the weekend and we may see our markets opening on a weak note as a result.

Markets this week are expected to react to various results and more importantly on the outcome of the policy review. As such a 25 basis point rate cut after dismal IIP data has already been discounted by the markets, so we may not see sharp reactions on the upside. On the flip side, the markets are expected to react negatively if there is no rate cut. Hence the risk-reward ratio seems skewed on the negative side.

The General Anti-Avoidance Rules (GAAR) issue is still haunting the Foreign Institutional Investors who have slowed down their investments substantially. It would be an uphill task to rebuild the confidence as more time passes by and we hope the government acts sooner than later.

Investors will look for the guidance provided by the management to gauge the earnings outlook. Crisil, Castrol, MindTree, IFCI, HDFC Bank, HCL Tech, Ambuja Cements, ACC, IndusInd Bank, Hindustan Zinc, Cairn India are some of the key companies declaring their results this week.

Airline shares like SpiceJet, Kingfisher and Jet Airways will be watched as the cabinet is likely to meet this week to consider the proposal to let foreign airlines buy stake in local carriers.

The euro zone structural outlook will inevitably be an important focus area with concerns that conditions within Spain will deteriorate further. Any negative news might have a ripple effect on the Indian equity markets.

The Nifty has so far respected the 200-DMA on weekly closing basis and is still trading in a range. This week may turn out to be decisive for the markets and we may see Nifty breaking down especially if the monetary policy is not favourable.

In case of a rate cut as per market expectation, we could see a short rally to 5,300/5,350 levels but that would be difficult to hold, considering the macro economic scenario and dull outlook on the global front.  The odds are in favour of a decline to 5,000-5,050 levels.

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