Dalal Street hopes its RBI guess is right

Dalal Street is hoping the Reserve Bank of India (RBI) policy review meeting on Tuesday will uphold its stand on easing of interest rates.

The benchmark Sensex of the BSE and the banking sector index saw sharp gains last week. The anticipation is that India’s central bank will follow other countries in easing monetary policy, to give a boost to the economy. More so, with the fall in Consumer Price Index (CPI)-based inflation and the slide in global crude oil prices and fall in consumer inflation back home.

“There is a belief in the market that RBI might be forced to consider a rate cut, based on the recent movement in crude oil prices and the improvement in GDP (gross domestic product) and inflation data. The markets have run up in anticipation and bank shares have been a big beneficiary of that,” said Gaurav Bhandari, senior vice-president, Centrum Capital.

Gaining for a third straight week, the Sensex added 1.7 per cent to end at a record 28,694. The National Stock Exchange’s Nifty ended at 8,588. The rate-sensitive BSE Bankex gained nearly three per cent.

However, though the market is pricing in a rate cut, very few economists believe it will happen.

“We believe the RBI is likely to keep policy rates on hold. We assign a very low probability to a rate cut in the meeting,” said Morgan Stanley Economist Chetan Ahya, in a note. “However, we believe the key to watch will be RBI’s language regarding its comfort about achieving its inflation target according to its pre-guided glide path — and, in turn, the implications for timing of the first rate cut.”

According to a Reuters poll, only four of 45 economists said RBI would cut rates on Tuesday. They feel inflation has to be stabilised at current levels before RBI can start bringing rates down.

Market experts say there could be a correction in share prices if there is little comfort from RBI. Traders are bracing for more volatility in the days ahead. “The momentum is positive but volatility would increase due to the events ahead. If there is no rate cut, the markets could react negatively and we could see a correction in the Nifty of about five per cent,” said Sahaj Agrawal, deputy vice-president, derivatives research, Kotak Securities.

Most vulnerable could be the banking stocks, most of which have posted double-digit growth in the past few weeks. Analysts believe companies benefiting from a drop in crude prices, such as in the oil marketing and aviation segments, will continue their positive run. Hindustan Petroleum, Bharat Petroelum, Jet Airways, Asian Paints and SpiceJet are stocks expected to be in the limelight. Also, automobile stocks will remain in focus as they release their monthly sales figures.