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RBI, Global Cues To Drive Market Sentiment

Monday, June 01, 2015
By Dominic Rebello

The Reserve Bank of India will announce its Second Bi-monthly Monetary Policy Review 2015-16 tomorrow, which is expected to set the future trend of the market. While many analysts, industry leaders and borrowers would like to believe that the RBI Governor would cut rates to boost growth in light of the recent positive GDP data, the monsoon and the impending Fed rate hike would impact the decision of the RBI Governor.

While the GDP figures at 7.3% for the financial year 2014-15 and 7.5% in Q4 2014-15 are impressive, the economy is still suffering from bad corporate results and low industrial production. Merchandise exports too have declined for five months in a row and growth in bank credit in the fiscal year was the slowest in two decades.

“The coming week is going to be a crucial one for equity markets as participants are eyeing the RBI’s monetary policy review, which is due on Tuesday, 2 June and markets are already discounting repo rate cut of 25 basis points. On the Macro front, HSBC Manufacturing PMI & Service PMI data is scheduled on June 1 and 3, respectively,” said Jayant Manglik, President-retail distribution, Religare Securities Limited.

Says Dhananjay Sinha, Head of Research, Economist & Strategist, Emkay Global Financial Services Limited.“The performance of the global and domestic equity market will significantly hinge on what fed does. Markets are likely to remain jittery ahead of a possible lift off from the over-accommodative fed stance it has maintained for past 6 years. Strengthening USD, weak commodities and weakening of EM currencies can impact portfolio flows into EMs and hence also India. Thanks to excess global liquidity, EMs have seen disproportionately large flows while they have lagged in terms of growth performance, including earnings growth,”

“Stocks have been reacting to results which on an aggregate basis are disappointing. In spite of poor results Indian market is holding on due to expectation of a rate cut on 2nd June RBI policy meeting. Lead indicators are showing mix trends. India needs heavy expenditure from the government side to kick start the investment cycle. This year’s monsoon will play a crucial role in consumption demand as we cannot afford to have back-to-back second year of below normal rains. Mild currency depreciation will be good for the economy as exports have seen consistent decline for several months. Combination of slightly higher MSPs (to spur rural consumption) and 5-6% currency depreciation (to spur exports) could help stimulate corporate revenue and profitability. For Indian economy, crude price needs to remain stable as most macro variables are linked to it. If monsoon is normal then expect all lead indicators to turn positive,” said Rajesh Iyer, Head – Investment Advisory Services & Family Office, Kotak Wealth Management
Hitesh Agrawal, Head Research, Reliance Securities says “The just concluded 4Q earnings season also indicates that the economic recovery has been sluggish and 1HFY16 could remain challenging. In this backdrop, coupled with the fact that India’s Inflation trajectory has remained well within RBIs comfort zone in recent months, a rate cut on June 2nd by the RBI may provide some support to market sentiments,”  

Incidentally, industry chambers hailed the uptick in growth data but, underlined the need for more initiatives on the ground level to improve investor sentiment and realise the true potential of the Indian economy. Industry chambers, meanwhile, made a case for further rate cut by the Reserve Bank at its monetary policy on June 2 in view of declining inflation. "Inflation, which was a major concern factor, has been on downward trajectory. We hope that Reserve Bank will cut the repo rate by 50 bps," said Ficci. Industry body CII said the figure indicates that policy and reform initiatives taken by the government are bearing results on the ground. "We expect further improvement of the key levers of the economy, going forward, as the government steps up public investment which in the process crowds in private investment to rekindle a new demand cycle in the economy," it said.

With 57% of the GDP composed of private expenditure, a recovering PFCE (Private Final Consumption Expenditure) is vital for its future growth. With recovering consumer confidence, we can expect PFCE to improve further lending support to the Indian growth story,” said Debopam Chaudhuri, Chief Economist & Vice President of Research at ZyFin Research.

“Timing of entry based on risk-reward matrix will be crucial to make money in this financial year. Markets could remain range bound till Sep’15 and then start moving up after Q2 results (since favourable base effect sets in from Q2-FY16). Hence, this year’s returns could be back ended and most of it could get realised in the second half of FY16. Buying on declines in the next 3-4 months when things are not looking good could be ideal strategy for HNIs. PMS schemes could do well this year if stock selection is proper,” advised Iyer.

“Auto companies will remain in focus as they will announce monthly sales figure for May month from Monday, 1 June 2015. Progress of the monsoon will also be closely watched as it critical for current economic progression. As per IMD report, it will hit the Kerala coast around 30 May 2015.
Considering the data and events which are lined up in the coming week, we expect volatility to continue across the board especially in the rate sensitive sectors like banking, auto, realty etc.,” said Manglik.

“Despite Friday’s rebound in index, our negative bias is still intact and it’ll remain so till Nifty is upholding below 8500 spot. As none of sectoral indices participating consistently nowadays, traders should live with stock specific trading approach and advice to spend quality time in stock selection or take professional’s help,” advices Manglik.

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