Banking stocks to see heightened activity

If the WPI numbers are exceptionally good, the possibility of a larger cut arises

Three key bits of macro-economic data have arrived.

First, exports saw a rise of 4.5% in February. The second piece of news was that the Index of Industrial Production (IIP) for January 2013 was up year-on-year by 2.4%.

Again, good news.

Between April 2012-January 2013 the IIP seems to have gained very slightly versus the corresponding period of 2011-12.

The third piece of news was that consumer price inflation was up 10.9% in February. Food (which contributes 47% of CPI) was up 13.7%. Clothing and footwear was up 13%. The next piece of inflation data, the Wholesale Price Index is due on Thursday. The WPI was up year-on-year by 6.6% in January. It has a much lower weight for food and clothing and another key CPI item, housing doesn't feature at all.

The inflation numbers are poor. On year-on-year calculations, this is the third month in a row that the CPI is running in double-digits. The divergence between CPI (up) and WPI (down in the last two months) is also tough to reconcile, even given differences in weights of food.

Assuming the numbers are broadly correct (government data is subject to massive revision), one assumes the economy is still bottoming. There has been some pickup in industrial activity and exports are likely to start doing better because the US economy is seeing a slow recovery.
Inflation is going to continue running high because of bottlenecks in food supply, if nothing else. The inflation effect on consumption demand has already been negative as seen in Q3 results and lower auto-sales.

After the WPI data is released on Thursday, we will have a better idea of the inflation situation. At that stage, the market will possess all the publicly available data pertaining to the RBI's next Credit Policy next Tuesday. Prior to the IIP and CPI release, optimists were hoping for a big rate cut of 50 basis points on the Repurchase rate. The high CPI numbers and ironically, the positive IIP numbers have dashed those hopes.

As of now, the consensus expectation is a minimum cut of 25 basis points. If the WPI numbers are exceptionally good (unlikely), the possibility of a larger cut arises. If the numbers are poor – if the WPI year-on-year change is above 6.75%, the consensus on a rate cut occurring at all will decline.

What is more interesting than the actually RBI action is that will lead to gyrations in the Bank Nifty over the next 4 sessions. Given historical volatility during these periods (the five sessions when IIP, CPI, WPI data is released and the Credit Policy) the index could swing between 11,700 and 12,400. Try and stay on the right side of the moves until March 19-20. Or stay out of financial stocks.
The author is a technical and equity analyst