Rate Cut Hopes Boost Market

For the month of March and April the Indian frontline indices registered a fall of 5.3 per cent and 3.4 per cent respectively. Infact for the first fifteen days of May, bellwether index was showing a negative performance. Nonetheless, in last fortnight market has seen smart recovery on back of rate cut hopes. This is reflected in the performance of the rate sensitive sector like BSE Bankex that has gained as much as 5.3 per cent between 12th and 27th May. Heavyweights like HDFC Bank and Axis bank gained more than six per cent in the same period.

Broader indices outperformed the frontline indices. For example mid cap and small cap indices gave return of 3.3 per cent and 3.6 per cent in last fortnight. In terms of sectoral indices all the sectors gained in last two weeks baring Metal and Realty whose indices fell by 1.9 per cent and 0.6 per cent respectively.

The earnings season is approaching at the fag-end and there are more misses than hits. Of almost 2800 actively traded companies, 1500 companies have reported their earnings and without any adjustment topline has grown by 7.27 per cent on yearly basis, while bottomline in the same time has increased by 2.7 per cent.

FIIs inflows too turned positive in last fortnight. After being seller for first half of May, FIIs purchased almost Rs 1000 crores of Indian equities between 12th and 27th May. The positive FIIs flows in since May 13th is despite Federal Reserve Chair Janet Yellen indicated on Friday (May 22, 2015) the U.S. central bank was poised to raise interest rates this year if the world's top economy improved as expected. However, on aggregate basis for the month of May, FIIs are still sellers and have sold a net of USD 400 million in the equity markets so far, the highest outflow since August 2013.

We believe worst is behind us in terms of volatility and there are no major triggers around and market is likely to consolidate in a narrow range. However, market may correct if RBI decides to maintain status quo on June 2 monetary policy review, as market seems to be already discounting a 25 basis rate cut. Therefore, we advise our readers to stay on sidelines till then.