New Document top_band
 
Business Standard

Trading strategies to gain from the credit policy

Related News

Is the tide turning for the financial industry? A lot of bets are riding on the Reserve Bank of India () switching its stance and cutting rates, and on January 24. The central bank started raising rates in February 2010, in a tight policy that continued until December 2011, when it left rates unchanged.

A , coupled with increasing signs of distress from India Inc, could lead to a rate cut. Easier credit would take a while to work through the real economy and, indeed, I think policy rates would need to drop 100-125 basis points before it makes a perceptible difference.

But any cut would have an instant, maybe short-lived, beneficial effect on share prices, especially in rate-sensitives like financials, auto and real estate. It would also have an influence on the rupee’s exchange rates.

Rate cuts may not happen. Inflation is politically sensitive and there are impending assembly elections. If the US-Iran argument gets more heated, crude oil prices will spike, guaranteeing more inflation. It’s a different matter that rate cuts (or increases) have zero influence on crude oil-driven inflation; it’s more a matter of being seen as doing something.

However, if there are rate cuts and some promises of more, the market will bid financials up. The rupee will probably harden, more because of Foreign Institutional Investor () inflows than fundamentals. In anticipation, the market is already bidding financials and real estate shares up. We may see a ‘buy-on-rumour, sell-on-news’ effect playing out.

If there’s a minimal cut of 25 basis points, prices will stabilise. There will be a sell-off if there are no cuts, and a big sell-off if there is a rate increase. If there’s a larger-than-anticipated cut, of 50 basis points, rate-sensitives will shoot up.

The highest-risk, highest-return segment is that of listed real estate firms.

The major non-banking finance companies () are also high-risk, high-return. Both sectors have taken a battering, so a big return could occur even on a dead-cat bounce. On the other hand, if RBI disappoints, a huge sell-off may take place.

It’s also possible to go long in the futures of specific banks directly or to go long in . Given that banks have good, high-beta correlation with the Nifty, it’s possible to hedge via the Nifty. Due to the hedging possibilities and also because banks are seen to have sounder balance sheets, they are less risky than real estate or NBFCs.

Keep that January 24 deadline in mind. Settlement comes up on January 25, and it could get chaotic if RBI pulls a rabbit out of its hat. There may be frantic volume action in these two sessions.


The author is a technical and equity analyst

Read more on:   
|
|
|
|
|
|
|
|

Read More

Just don't stick to numbers alone

Financial analysis involves comparisons of multiple variables. For example, an analyst may look at an automobile-maker and decide the valuation is ...

Quick Links

 

Market News

Today's picks

Nifty, Bank Nifty, HCL Tech, Coal India & Tata Steel

Markets fall to 1-week closing low

The BSE Sensex and Nifty fell on Monday to their lowest close in a week, as profit-taking hit shares of blue-chips such as ICICI Bank for a ...

Centre reduces insurance premium on cotton crop to 6%

The new premium is applicable to all cotton-growing farmers across the country with immediate effect

Moody's to upgrade ratings of Tata Steel, British arm

Review upgrade has been triggered by issuance of $1.5 bn worth bonds by ABJA Investment, guaranteed by Tata Steel

Sebi confirms curbs on Khoday India

The watchdog had imposed curbs on the company for not achieving the minimum 25% public holding within the June 3 deadline

Back to Top