TO OUTPERFORM!

It was one of the most eventful fortnight for the Indian equities. What we witnessed in the last fortnight was that, the much awaited election results were announced where the Congress was dusted and the Narednra Modi-led BJP government won with an exceptional majority. The Cabinet of the new government was also formed during the last fortnight. These were the triggers which the market participants were looking for. However as the events occurred, the markets remained range bound since then. Though the frontline indices had actually opened gap up with more than 1000 points on the day of poll results announcement, it witnessed some amount of profit booking on the same day and closed with gains of around 250 odd points. Since then the markets have remained highly range bound.

While it is true that the markets remained range bound, there was high amount of volatility on intraday basis. On the other hand, on May 26th, the indices opened in green ahead of the Cabinet formation. However profit booking took the indices southwards to close almost on a flattish note.

So what does this indicate? This sort of trading only indicates the fact that the profit booking is happening only because the markets have witnessed a good up-move in the past one month. Another factor is that, the markets are looking for triggers. So, to understand the expected move of the indices, we need to understand the immediate triggers for the Indian equities and what they are going to be.

While the cabinet formation has almost been done, what action plan is being fromed by the respective ministries need to be seen. There are quite lot of challenges for the new government going forward, the priority being containing the fiscal deficit and then presenting a prudent budget. Hence a proper action plan in place from the new government would be the first trigger.

Apart from that, the second trigger would be the RBI policy announcement on June 2, 2014. With rising inflation being the prime focus area of RBI, market participants would be keen to know as to what stance RBI takes in order to align itself with the new government. Though there are some positive signs, the RBI has also started to unbundle a few restrictions it had implemented to arrest the rising CAD and depreciating INR. We are of the opinion that, considering the inflation level (still above the RBI tolerance levels and possible El-Nino effect adding to woes) the RBI is likely to maintain status quo this time around.

As far as the movement in equities is concerned, we feel that the front line indices will take a breather for some time. However, the mid-cap and small-cap indices are likely to gain traction. The simple reason behind this is, while the Sensex and Nifty are already trading near to all time high levels or are trading above the highs made in 2008, mid-cap and small-cap indices are yet to achieve those levels. All in all, we expect profit booking to keep the Sensex under check for the next fortnight.