RBI policy: Financials in focus

An analysis of the current scenario by Devangshu Datta

A certain kind of repetitive news event lends itself to scenario-based trading. There are consensus expectations, and the results might hit consensus, exceed consensus or disappoint. Prices will react accordingly.

The RBI's regular policy reviews fall into this category as do quarterly and annual results. There are consensus expectations. If those are met, prices don't move much. If those are exceeded, the rate-sensitive sectors tend to see a steep rise. If there's disappointment, losses occur. In the case of the RBI, post-policy movements can establish a short-term trend that lasts around three sessions.

Trading this sort of event is a controlled risk. First, the trader notes the consensus. Then he takes a view as to whether the policy will beat consensus, hit consensus or miss it. Accordingly, he takes a position, which could be either long or short. If the policy is not in line with expectations, he exits. Otherwise, if the trend goes as he hopes, he sets a trailing stop-loss and stays with the trend.

The next RBI policy review is due on December 18. The market doesn't expect a policy rate cut or hike. The consensus suggests that there will be another CRR cut. The key index to watch is the Bank Nifty. Within the Bank Nifty universe, the high-beta stocks such as Yes Bank and Axis Bank may move more than normal. Apart from banking stocks, NBFCs and specialised financial institutions like housing finance stocks and infra-lenders such as PFC and IDFC will be among the most sensitive to the review. So this is the set of instruments the trader should target.

The Bank Nifty is trading between 12,250-12,450 with the December futures at around 70-80 points premium to the underlying. There's plenty of time till expiry so the cost of carry won't change due to the time factor. The Bank Nifty also has a recent high of 12,600 and a tendency to move around 200 point a day in terms of high-low ranges. The day of the policy announcement and the sessions immediately following that usually have a higher than normal daily volatility.

If the RBI beats expectations in that it does announce a rate cut along with a CRR cut, the Bank Nifty is likely to jump to a new high. It could rise beyond the 13,000 mark. If the RBI offers just a CRR cut, the index is likely to move down slightly but find support at around 12,100. If the RBI actually hikes rates and doesn't offer a cut, a sharp fall till below the 12,000 level could result. So the trader is seeing a potential movement of about 500-600 points in either direction.

The author is a technical and equity analyst