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Monetary Policy Tomorrow Will Trigger Next Directional Move

Monday, April 04, 2016
By Dominic Rebello

Last week the Nifty futures were on roller coaster ride, but managed to close in positive territory, amid high volatility to hit its highest levels in more than 12 weeks. But Market breadth indicating the overall health of the market was mixed as buying was witnessed in sectors specifically in banking, metals, cement, infra, capital goods and select mid cap stocks etc. Perhaps, what triggered the positive sentiment was the latest comments from the US Federal Reserve, which said that it would move slowly on raising interest rates in 2016.

Now however, all attention will focus on the key events scheduled for the markets this week. Tomorrow the RBI will announce its first monetary policy review FY 2016-17. Expectations are that the RBI will cut lending rate by at least 25 basis points. The government's announcement of a reduction in interest rates on small savings schemes for Q1 June 2016 and dovish comments from US Federal Reserve have reinforced market expectations of a rate cut from the RBI. The outcome of the RBI's monetary policy, trend in global markets, investment by foreign institutional investors (FIIs), movement of crude oil prices will therefore dictate trend of the market in near term.

Says Arundhati Bhattacharya, Chairman, SBI  “We expect the RBI to address the issues of systemic liquidity. Currently, the issue of high volatility in currency holdings of public (both in the form of cash and jewellery) as well as Government’s cash balances with RBI is leading to volatility in the system's liquidity. To this end, the Government’s cash balances may be placed with Public Sector Banks, instead of with RBI, so that the cash remains within the banking system and does not create unnecessary volatility in money markets. Such an action will provide a clear picture of the money available within the system which will not get distorted by Government Borrowing. This step would increase the Government’s revenue as the funds can be kept in an interest bearing account with the Banks.The central bank should also examine why the currency holdings with public has increased so much. The central bank may also alleviate the market participants concern about potential Dollar shortages in September/ October 2016 related to maturity of special FCNR(B) swaps was mentioned to RBI”.

So then will a much expected rate cut be announced. Nobody, can tell as yet. But it will play a decisive role on stock market behaviour. Says Dipen Shah, Senior Vice-President & Head of Private Client Group Research, Kotak Securities, the “Markets ended the week flat, indicating consolidation post the sharp rise post budget. Expectations of rate cut by RBI led to consistent interest in the banking sector. Going ahead, markets will watch out for the all-important RBI policy meeting on 5th April, post which quarterly results will dictate the stock specific trends. We will watch out for legislative action in the second half of the budget session, which will have important implications for the market.”

Adds Jayant Manglik, President, Retail Distribution, Religare Securities “Hopefully, the upcoming monetary policy will provide the needed trigger for next directional move, scheduled on Tuesday. However, the recent rally in the rate sensitive pack indicates that market has already discounted a cut of 25 basis points and anything over or above that mark would push the index higher else consolidation will continue. Meanwhile, traders should maintain positive yet cautious approach and keep the leveraged positions hedged.

Adds Jimeet Modi, CEO, SAMCO Securities, the “RBI is expected to announcea rate cut on its April 5th meeting. A reduction of 0.5% is the expectation of the street, but a lower than expected rate cut would set in a deeper correction in the markets.

On the technical front, Rohit Gadia, Founder & CEO, CapitalVia Global Research, says “Technically, on the daily charts, the short term trend of the Nifty Future seems up as it gave positive weekly close above 7700 levels and sustained above the100 DMA. On the downside  7600 will now act as a strong support level, as it bounced from the levels during the week. Thus, in near future, it may test the levels of 7800 levels which is its next immediate resistance level and on downside immediate support level is at 7600 levels.

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