The Reserve Bank of India (RBI) will announce its next credit policy on Tuesday. Inflation remains high, while growth is making an anaemic recovery of some description. The latest quarterly GDP numbers, taken with the Index of Industrial Production (IIP), suggest, at the least, the trend of deceleration has ended. The rupee may have stabilised in the band of 52-55 versus the US dollar.
The inflation rate, based on the Wholesale Price Index (WPI), was at 7.81 per cent point-to-point in September, up from 7.55 per cent in August, and a low of 6.9 per cent in July. The consumer Price Index (CPI) was up 10.3 per cent in August 2012. CPI has been in double digits since April 2012. GDP growth in the April-June 2012 quarter was at 5.5 per cent, up slightly from 5.3 per cent in January-March 2012. IIP rose to 2.7 per cent in August, nothing to write home about, but better than the flat June and July numbers.
The consensus is RBI will not cut rates, but it may cut the cash reserve ratio (CRR). If the central bank reads the data as indicating a trend of mildly improving growth and high inflation, it will not be inclined to cut repo rates. It has already made CRR cuts. It may, or may not, cut CRR again. No action, or token action, would put RBI at odds with the hopes of cuts expressed by the finance ministry and corporate houses. But, RBI can make a good case for remaining hawkish.
In the short run, a trader would be interested in the impact of the credit policy on the Bank Nifty, on non-banking finance companies (NBFCs) and other rate-sensitive stocks. No cuts would not shock the market and the financial index would remain on the lower side of the current range it is trading in. That is, the Bank Nifty would continue to move between 11,300 and 11,650. The movements of individual banks and NBFCs would be influenced more by specific details of their respective Q2 results and balance sheets.
What happens if RBI pulls a surprise out of its hat? A mildly negative surprise would be no CRR cut. A highly negative surprise would consist of a rate increase. Objectively, an increase is a decision that RBI could easily justify, given inflation data and the likelihood of a further spike in WPI, since diesel prices have been raised.
If RBI does raise the repo rate, a short position on the Bank Nifty, coupled with hammering selective banking and NBFC stocks, would be highly profitable. The Bank Nifty may well fall till the 11,000 level or lower, if there's a rate increase. In this instance, the specific details of bank balance sheets and Q2 results would be ignored by bears. The Nifty would also fall, though the effect on the broad market would be less marked.
The positive surprise would be RBI cutting rates. This would be a gamble and at odds with its historically conservative approach. But it's possible the finance ministry and companies could exert enough "moral influence" to make it happen. The market would jump out of the trading range and the Bank Nifty may test the 12,000 level on a repo cut. Similarly, the Nifty would also have chances of executing an upside breakout beyond 5,800.
The Bank Nifty closed at roughly 11,500 on Friday. So, there's a possibility of it moving roughly five per cent in either direction, if RBI does surprise. There's a group of high-beta stocks worth watching. In the banking sector, Axis Bank, YES Bank and IDBI are all high-beta stocks. In the NBFC space, IDBI, PFC, LIC Housing and Reliance Capital are high-beta. A trader who is looking to make a quick buck could focus on these stocks and hope for a directional bias.