Actions of two central banks could determine the direction of Indian stocks in the week ahead. While the Reserve Bank of India (RBI) decision on policy rates tommorow is likely to set the tone for domestic stocks this week, the outcome of the US Fed’s two-day meet ending Wednesday — which could give some clarity on its monetary policy outlook — could have wider implications on global financial markets.
Hopes of a policy-rate or repo rate-cut by RBI have diminished following the recent decline in the rupee against the dollar. So, if the Indian central bank keeps the repo rate (at which it lends to banks) intact, markets would not be disappointed, said fund managers.
Rajnish Rastogi, senior fund manager and co-head (equities) at Motilal Oswal Asset Management said, “With GDP growth rate being low and inflationary pressures on a downward trend, a 25-bps (basis points) cut in the repo-rate was a given. But the deterioration in the rupee from Rs 52-53 against the dollar to Rs 57-58 has changed the consensus.” “We are getting a 'no rate cut' policy”. A weaker rupee makes imports more expensive, thereby adding to inflationary pressures.
Investors, however, think RBI might cut the cash reserve ratio (CRR) — the minimum amount banks need to hold with the central bank, to ease liquidity.
“A CRR cut of 25 bps is what some quarters of the market are looking forward to,” said Amish Munshi, senior fund manager, Tata Asset Management. “With the declining rupee situation, high current account deficit numbers, markets are not expecting a repo rate cut.”
After RBI’s meeting, investors will closely watch the US Federal Open Market Committee meeting. If Fed chairman Ben Bernanke signals that the US central bank might cut down its bond buying programme known as Quantitative Easing 3 (QE3), it could weigh down sentiment in emerging market equities including India’s. The liquidity from QE3 has made its way to equity and bond markets worldwide.
Ramanathan K, executive director and chief investment officer at ING Investment Management said, “Markets will go up if the Fed does not indicate a time-frame for the withdrawal of the QE3 programme or if the time-frame provided is long enough. However, markets will go down if the time-frame provided is short” .
Fund managers said the consensus in the markets is the Fed may consider withdrawing QE3 beginning September.
Technical analysts said the Natinal Stock Exchange’s benchmark Nifty is likely to trade in the 5,700-5,900 range. “The Nifty on Friday closed above the 200-day moving average of 5,796, which is a positive. In the next few days, the market is unlikely to fall below 5,696,” said Alex Mathew, head of research at Geojit BNP Paribas Financial Services.
On Friday, the Nifty ended at 5,808, while the BSE Sensex closed at 19,177,
“We have observed a lot of put writing at 5,700-levels, which means the markets are not expecting an immediate breach below these levels,” said Ashish Chaturmohta, head (technical & derivatives analysis) at Fortune Equity Brokers.
