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Straight from the Specialists

India Markets Weekahead: RBI policy review to be catalyst for markets

By Ambareesh Baliga
October 28, 2012

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

This was a listless week with the Nifty in the same band of 5640 and 5720 as the previous week, closing about 20 points lower at 5664. The festival  season has begun but the mood on the street remains cautious.

There were several car launches by Maruti, Ford, Tata and General Motors but by far the most successful one was Maruti Alto 800, an entry-level vehicle which clocked bookings of over 24,000 in a week.

Commuters walk past the Bombay Stock Exchange (BSE) building in Mumbai February 28, 2011. REUTERS/Danish Siddiqui/Files

The political heat shifted to the opposition camp with Nitin Gadkari, president of the Bharatiya Janata Party, embroiled in a controversy relating to a web of shell companies which purportedly invested in his Purti Power and Sugar Ltd. The Congress-led UPA government can breathe easy till the winter session unless some new expose puts the focus back on them.

In Europe, Spain reported a jobless rate of 25 percent, a record high, which is expected to deteriorate further. The economy also shrank by 1.7 percent in the third quarter. The much awaited Troika report on Greece seems to have been delayed further. These could be the trouble spots before the move to a single supervisory mechanism for euro zone banks in 2013.

A results-heavy week saw some surprises from L&T and Mahindra and Mahindra which posted better-than-expected results. Public sector banks continued to reel under non performing assets (NPA) stress with Punjab National Bank disappointing for yet another quarter. A divide between private and public sector banks is widening with more NPAs expected going ahead. Hindustan Unilever results indicate a slowdown in consumer demand during the September quarter.

The coming week would see most of the remaining results pouring in such as BHEL, Maruti, Grasim, Biocon, Titan and Jet Airways. Maruti results would be weighed down by the Manesar plant issue. Jet Airways may not be able to show spectacular results despite stable oil prices, lesser competition and high airfares as the load factor for the airline sector has slipped in the last 3 months.

FCCB redemption is a problem for mid-sized companies which had gone on a capital raising spree during the boom period closer to 2008. The conversion price of most of these instruments is much higher than the current market price — in some cases it is higher than 5x. The downswing in the last 4 years and rupee depreciation along with leveraged balance sheets have brought these entities to a point of definite default. It needs to be seen how these companies tackle the possibility of a slew of liquidation suits which will follow the default.

Next week is crucial for Indian markets with the much awaited Reserve Bank of India (RBI) policy on Oct. 30. I expect a repo rate cut of at least 25 bps as this would be a signal of endorsement of reforms by the RBI. Secondly, a repo cut will not increase liquidity unlike a cash reserve ratio cut as it benefits only those banks which access the RBI window. A repo cut plays a larger role in signalling the direction of interest rates and would be a sentiment booster to continue the momentum of the government’s policy reforms.

The cabinet reshuffle on Sunday will see a number of new faces and hopefully, a recharged team which will embark on a second round of policy action before the winter session of parliament.

The coming week will finally provide the direction for the markets going ahead, with the RBI policy being the catalyst. I still maintain my view of a breakout above 5800 levels as a number of  fundamental factors favour an upward bias.

The political scenario seems stable for the next few months, crude oil has declined sharply, the rupee is stable, quarterly results have been better than expected and FIIs are still favorably disposed towards Indian markets. Purchasing Manager’s Index (PMI) data on Nov. 1 will probably show the effect of policy measures in the last few weeks.

Best to utilise the current correction to buy the “nation builder” sectors as they would be in focus for the next few months.

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