RBI To Maintain A Status Quo

After remaining range bound for a long time, the Indian equity markets managed to break the shackles yesterday. Markets ended on a strong note on account of strength in the capital goods space and a bounce back in the banking counters ahead of the RBI policy meeting. The Sensex closed at 24,685, stronger by 468 points and the Nifty was up 133 points at 7,363. As we have been stating since the past few weeks, the mid and small-cap counters were back in demand. The small-cap and midcap indices advanced over 2% each in today’s trade. All the major sectoral indices, barring defensives such as FMCG and Pharma were in the green, with capital goods and banks leading the up-move.

The RBI is widely expected to keep rates unchanged when it reviews its monetary policy tomorrow, the first since the new Modi-led government's reign at the Centre. Currently inflation is still not under the tolerance levels of RBI. Hence the RBI may not decrease the key rates. But another factor is the IIP growth has been stagnating and hence it was the need of the hour that RBI reduces rates. But with RBI taking interest as a sole tool to control inflation, we also feel the RBI is unlikely to reduce the repo rates.

On the economic front, manufacturing activity inched up in May compared to the previous month, according to the widely-tracked HSBC Purchasing Managers' Index (PMI). The index for manufacturing rose marginally to 51.4 points in May from 51.3 points in April 2014.

Apart from that, he output of eight core industries increased 4.2 percent in April 2014, boosted by higher electricity, fertiliser and cement production. The coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity sectors had expanded 3.7 percent in the same month last year. This is positive news on the macro front that the core activity is gaining some traction.

As for the US markets, the Dow and the S&P 500 finished at record highs again on Monday after a closely watched read on U.S. manufacturing was revised to show more strength than initially indicated. Noticeable factor is, after hours of confusion, the Institute for Supply Management officially corrected its earlier report to show that the pace of growth in the US manufacturing sector accelerated in May. The Dow Jones industrial average rose 26.46 points or 0.16 %, to 16743.63. The S&P 500 gained 1.40 points or 0.07 %, to 1924.97.

Asian stocks rose, extending a six-month high, after a gauge for China’s services industry increased amid optimism a separate report on manufacturing will add to signs the world’s second-largest economy is rebounding. Bloomberg stated that, a preliminary reading of HSBC’s China manufacturing purchasing managers’ index came in at 49.7 for May 2014. This was the highest reading this year. China’s official Purchasing Managers’ Index expanded to 50.8 in May, the highest level since December 2013. Now Nikkei is trading at 15033 (Up 0.65%) and Hang Seng is up (0.72%). Even Shanghai Composite is trading with gains of 0.36%.

As for the Indian markets the SGX Nifty is trading with gains of 0.32%. Though the indices are likely To open with positive bias, we expect a cautious trading activity ahead of RBI policy announcement at 11 AM.