Devangshu Datta: Markets on the 'cutting' edge

Last Updated: Mon, Jan 28, 2013 05:23 hrs

Will he or won't he and, if he does, how much? Despite the continuous news flow about third-quarter results through the past fortnight, the focus is firmly on Tuesday's credit policy. There seems to be more or less absolute consensus that D Subbarao will finally start a cycle of cutting policy rates and a number of optimists are betting he will do so with a big bang.

A 25 basis points repo cut coupled to some easing of the cash reserve ratio would meet most market expectations. But there's speculation that the Reserve Bank of India (RBI) will go for a 50 basis points reduction. It could happen because the RBI did try this once last year. If the central bank does belie expectations by refusing to cut, or heaven forfend, raising rates, it could trigger a bloodbath.

The credit policy review is just two days ahead of the monthly settlement on this occasion. It is almost guaranteed to set off some sort of trend. If that is positive, many traders will carry over long derivative positions. If the RBI doesn't cut, or the market is over-optimistic and the RBI doesn't cut by enough to satisfy, the unwinding of long positions could get disorderly.


Current (Jan 25) Jan 11
Nifty value 6,074.65 5,951.3 2.07
Index PE 18.8 18.8 0.00
Index dividend yield 1.36 1.39 -2.16
Index book value 3.2 3.17 0.95
USD-INR (RBI ref rate) 53.85 54.54 1.27
FII net buys/sales
(Jan 1-24)#
16,638.52 24,299.2& -
DII net buys/ sales (Jan 1-24)# -3,543.06 -2,698.5& -
# Rs crore,
& = Dec 1-31 net buys/sales

Obviously, the banking and non-banking financials will be the most directly affected. But realty and automobile stocks are also pretty rate-sensitive. The Bank Nifty is likely to bear the brunt of the action. Based on prior history, the banking index could swing 350-400 points on Tuesday, and see heightened volatility through the rest of next week. Since the Bank Nifty has a very high-beta relationship to the Nifty, the major market index is quite likely to see volatility spiking.

In addition to this, there is of course the telecom auctions. The market seems to be selectively optimistic about this. Idea, Airtel and Reliance Communications have all received support from bulls in the past week. Rcom's results have been well-received as well.

There were a string of other results from majors across various sectors and roughly 40 per cent of market capitalisation has reported in Q3 so far. NTPC didn't move the market much, but Reliance Power's results saw the stock spike four per cent. The results of Larsen & Toubro and Maruti have also been well received.

Initial panic about Ashok Leyland translated into a strange session where the stock first dropped about 10 per cent and then climbed back to close with serious gains. Tata Motors has lost a lot of ground after a margin warning from Jaguar Land Rover (JLR). Hind Unilever has also seen a sell-off. Reliance has hit new 52-week highs on the back of improved refining margins. However, sooner or later, somebody will short the stock on the basis of the continuing decline in KG-D6 output.

On the PR front, Chidambaram carries on with his charm offensive. He seems to have successfully allayed some of the fears of overseas investors about changes on the tax front. Thus far, foreign institutional investors (FIIs) have bought a net Rs 16,638 crore in Indian equity in January, which means that they maintain the bullish stance from last year. Domestic institutions still appear bearish and they've intensified selling in January. The rupee has gained against both the dollar and the yen in the past fortnight.

In the past month or so, realty, information technology (IT) and oil and gas have been among the depressed sectors that have delivered outperformance. IT and the oil and gas public sector undertakings could continue to offer out-performance through the year if the advisories and projections hold for the former, and the government doesn't back off on its apparent determination to rationalise diesel and gas subsidies.

Reading between the lines, the government cannot afford to back off. Noises from rating agencies about a possible sovereign downgrade to negative are perfectly credible. Despite Chidambaram's brave words about pulling back the fiscal deficit, national finances are in pretty bad shape. The fiscal and current account deficits will be at record levels for 2012-13, and gross domestic product growth rates didn't show much signs of a pickup in Q3.

The hike in gold import duties is one signal of desperation. So there is indeed a likelihood of raising tax rates (and not only for the "very rich") or trying to find some other way to increase revenues by introducing some new tax. The attempt to juggle entitlements in an election year versus expenditure cuts promises to provide much entertainment through the next fiscal.

The pricelines of the major market indices continue to look bullish in purely technical terms. The Nifty has found persistent support above 6,000 and inched upwards with a succession of incremental new highs. It should have a target of 6,150-odd and that might be achieved on Tuesday itself, if there's a bigger than normal rate cut.

However, if the market falls below, say, 5,920, a pullback till 5,750 is not unlikely. There has been a narrowing of breadth with many midcaps languishing without much support. This is not surprising - the FIIs remain the major drivers and they don't buy midcaps. So, as usual, dabblers in small stocks alias retail traders have managed to lose money in a rising market.

Next week, as mentioned above, is likely to be very volatile and this could translate into Nifty sessions where the daily high-low ranges are 100-125 points. Trend following technical systems suggest remaining long on the Nifty with a stop loss at, say, 5,875-5,925. But a hedge with some sort of deep February put could work very well if the market dives. All it will take to trigger panic selling at these elevated levels is one piece of unexpected bad news from anywhere in the world.

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