RBI’s Decision On Interest Rates To Provide Further Cues

In the last week, the Indian markets witnessed quiet movement as far as the indices are concerned. On Friday (Jan 25, 2013), though, the markets saw a gain of more than 170 points. The Sensex and the Nifty remained flat in the green, gaining a mere 0.32% and 0.17% respectively.

Like the last three quarters, the results have been above the street’s expectations, and the key players of India Inc. have come out with strong results. Reliance Industries has posted a net profit of Rs 5500 crore, witnessing a growth of 24%, which is higher than the expected growth of 12%-14%. The construction conglomerate Larsen & Toubro has posted better-than-expected results, and their order book has also grown.

However, the most important trigger for the markets has been the announcement by the Finance Minister to curtail the fiscal deficit by 60 basis points per year till FY15.

On the global front, China has continued to show strong signs of recovery. As per the latest release, China’s HSBC Flash Manufacturing PMI reading has come at 51.9 for Jan 2013, the highest in the last two years. Besides, the Flash Manufacturing Output Index for China came in at 52.2 for Jan 2013, reflecting even better expansion in the manufacturing sector.

In another development, the Bank of Japan had its two-day policy meeting, which was closely tracked by the global markets. The recently elected administration of Prime Minister Shinzo Abe put intense pressure on the central bank to act aggressively towards spurring growth and to end the spree of falling prices. The meeting saw a revision of the bank’s ‘price stability target’ from the earlier 1% to 2%.

On the European front, ECB President Mario Draghi suggested that the worst of the sovereign debt crisis may be over. Draghi said that the “darkest clouds” over the Euro area have lifted due to decisive policy steps last year. However, in a latest data release, Britain’s economy shrank more than the forecast in the fourth quarter. The GDP dropped 0.3% from the 3 months through September, when it grew by 0.9%.

On a sectoral basis, 5 out of the 13 indices have closed in the positive territory. The major gainer is the BSE Capital Goods index, closing the week higher by more than 2.44%. This was mainly led by the better results posted by Larsen & Toubro. The main draggers this week were the BSE Realty index (-5.49%), followed by BSE PSU (-2.33%) and BSE Auto (-2.01%).

FII inflows remained strong in the last week, as they pumped in Rs 4519 crore, taking the total so far for CY13 to Rs 16427 crore. DIIs continued to remain in the red, and in this month of Jan 2012, they have sold stocks worth Rs 1062.
Going forward, all eyes will be on the RBI policy meet that is scheduled next week on Tuesday, Jan 29, 2013. The street’s expectations are that the RBI will move ahead with a rate cut this time as inflation has come down below the RBI’s target of 7.5%. However, the markets will get a boost only if the RBI surprises with a 50 basis point interest rate cut. We feel that a 25 basis points cut is already discounted in the market.