The past few sessions have seen the stock market stage a partial recovery on hopes of policy reversal by the Reserve Bank of India (RBI). There is some logic for easing. Inflation appears to have peaked. Second quarter corporate results indicate margins are being squeezed and every indicator signals the slowing of macro-economic growth. So, easier money could offer some relief for companies, and, perhaps, help keep consumer demand buoyant.
There is also logic for keeping rates (and cash reserve ratio) at current levels. The Wholesale Price Index indicates inflation is still around 300 basis points above the RBI’s target zone. Loosening up may trigger a fresh burst of inflation. Also, the central bank must reckon on the rupee remaining weak. If crude oil prices rise, perhaps due to an embargo on Iran or further trouble in West Asia-North Africa, inflation will surely spike.
Pause, cut or raise? These are the three outcomes a trader must bet on. A further raise may not happen. At least, the consensus opinion is against it. If it does, the indices will nosedive again.
A pause is possible, given that the RBI governor hinted he might do this in his last policy review. A pause may have zero impact or trigger a small relief rally. Even as a cut is not very likely, it would certainly lead to at least a temporary jump in equity valuations.
The investment patterns of the past 10 sessions make one thing clear. As of now, foreign institutional investors (FIIs) are not happy about India as an investment destination. They have had net sales of more than Rs 4,480 crore in the past 10 sessions, more than the Rs 4,360 crore the domestic institutional investors have bought.
What is more, several FIIs have released recent advisories suggesting they remain underweight on India. The retail FDI rollback-holdback will scarcely make them more enthusiastic. Either, they don’t expect the RBI to loosen or they don’t think it’ll make a substantial difference.
Given that the market has risen in the past 10 sessions, the impetus has presumably come from big domestic operators and retail traders. As a group, they tend to be the least well-informed and the most likely to guess incorrectly or be blindly optimistic about policy decisions.
I cannot pretend to read the mind of Mr Subbarao. But, if the smart money is long-term bearish, I wouldn’t be very committed to trading long.
From the trading perspective, Bank Nifty is high-beta with respect to the Nifty and has ample liquidity. It will lead the rally if there’s one. It will also slide lower than the Nifty if there’s a downturn. And, long or short, Bank Nifty futures positions can be hedged by using Nifty options.
The author is a technical and equity analyst.
