After rate cut, markets turn to GST, Q2 results

Analysts also remain mindful of the geopolitical situation that has the potential to dampen sentiment; remain cautious on rate sensitive stocks

The markets gave a lukewarm response to the Reserve Bank of India’s (RBI’s) decision of slashing repo rate by 25 basis points (bps) to 6.25 per cent. The S&P BSE Sensex hit an intra-day high of 28,404, while the Nifty50 hit reached 8,783 levels. Both indices, however, trimmed gains to end at 0.4 per cent higher at 28,334 and 8,769 levels, respectively.

A runaway rally, analysts say, was ruled out as markets had already priced in a 25 bps rate cut given the decline in retail inflation to 5.1 per cent in August. They expect the focus to shift to corporate results and the implementation of the GST (goods and services tax).

“Markets were expecting a rate cut on Tuesday, and we saw a good rally a day earlier in anticipation of this. Markets will now focus on developments regarding the GST. The second quarter results (Q2FY17) of India Inc and the US Presidential elections will also impact sentiment. In this backdrop, I expect the Nifty to remain range-bound between 8,500 – 8,700 levels,” said U R Bhat, managing director, Dalton Capital Advisors.

That apart, analysts remain watchful of the geopolitical situation between India and Pakistan. Though experts do not expect a flare up, they remain vigilant of the developments, which have the potential to dent market sentiment and impact foreign fund flows.

“The recent geopolitical development has made investors cautious. I reiterate that India’s macroeconomic situation remains strong. In this backdrop, I suggest investors look at large-cap stocks, especially defensive plays like ITC, Lupin and Infosys. I feel the next leg of the rally will be driven by these stocks,” says G Chokkalingam, founder & managing director of Equinomics Research & Advisory.

Investing strategy
Analysts believe there is room for future cuts, albeit the timing would be data dependent and may track the US Fed’s stance and impact of the Seventh Pay Commission’s award. However, given the recent rally and rich valuations of rate-sensitive stocks, they suggest investors remain cautious.

Jayant Manglik, president - retail distribution at Religare Securities, recommends a “buy on dips” approach and advises investors to remain specific front till consolidation continues in Nifty. “Among the rate- sensitive pack, non-banking finance companies are leading, followed by auto and banking, and we believe this trend will endure in the short run, so plan your trades accordingly,” he says.

Since the start of the market rally in March 2016, Nifty Auto, Nifty Bank and Nifty Realty indices have outperformed the market by rising around 45 per cent, 41 per cent and 61 per cent, respectively, compared to a 25 per cent rally in the benchmark Nifty50 index till Tuesday.

“The past few days’ short covering rallies left little room for further upsides after the monetary policy delivered a unanimous verdict to cut rates. The changed timing of the announcement also meant as soon as the rate decision sunk in, global dynamics gained the upper hand, putting a lid on further upsides. Markets also chose to take profit as the second half of the week is likely to see focus shifting to US jobs data. With the pound slumping, Brexit worries would also put IT sector and auto ancillaries in focus,” said Anand James, chief market strategist, Geojit BNP Paribas Financial Services.

Within banking, Chokkalingam recommends Axis Bank and Karur Vysya Bank; and dividend yield stocks in the mid-cap space.