How to trade rate-sensitive stocks ahead of RBI policy?

Here's how to approach banking stocks and other rate sensitive plays such as Capital goods in the run-up to RBI monetary policy review later in the month

Markets opened on a weak note and have constantly edged lower during the day, after yesterday's over 1% downtick, on fears a rate (repo) hike by the Reserve Bank of India (RBI) after key economic data released on Thursday showed a sharp spike in November retail inflation while industrial activity in October hit all time lows.

Finance Minister P. Chidambaram's optimism when he saw green shoots of economic recovery was met with stark reality in the month of October as economy was found to be weeded in sluggishness as Industrial output sank to a four month low.

The Index of Industrial Production (IIP) declined to a four-month low of 1.8 per cent in October, despite festival-related demand, compared with two per cent growth in September. Part of the decline could be attributed to a 15-month-high growth (8.4 per cent) seen in industrial output in the same month last year.

As a result, market players expect the central bank to increase the repo rate by at least 25 basis points to eight per cent, levels seen at the beginning of this year.

Driven primarily by high vegetable prices (food prices soared by an annual 14.72 per cent), the CPI inflation rate accelerated to an all-time high of 11.24 per cent in November (from 10.17 per cent the previous month), making RBI's task to control prices without hobbling chances of a rebound more difficult.

So, how should you approach banking stocks and other rate senstitives plays such as Capital goods in the run-up to RBI monetary policy later in the month.

Devangshu Datta, independent technical analyst and market expert tells you what you should be doing with financials and other rate-sensitive stocks. 

SmartInvestor : Nifty 6200 in early trades today. Do charts indicate significant weakness ahead. What levels are to be watched out?

Devangshu Datta : In general congestion (support/ resistance pts at every 25-pt interval). Below 6200 support, next key support at 6175, if that breaks, it could find support at 6150. Yes, the downtrend seems to be quite significant but if 6175 or 6200 holds, the index could bounce back til 6275.

SmartInvestor : Banking and Financials are under heavy fire today post latest economic data. What will you suggest those who have significant positions in heavyweights there. Do you like any names from private banks?

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