With inflation rising, policy options were limited

The Reserve Bank’s Credit Policy on Tuesday went more or less on expected lines. The central bank tightened liquidity but in minimal fashion with increases of 0.25 per cent in each of the repo (post-hike 5.25 per cent), reverse repo (3.75 per cent) and CRR (Cash Reserve Ratio). The trend of tightening started in January when CRR was raised for the first time in over 12 months. In March, RBI pushed up the Repo and Reverse Repo policy rates by 25 basis points each.

Policy options are limited since inflation is still rising. The stock market’s initial response was favourable and reflected in the BankNifty’s (BN) rise of about 1.6 per cent to around 9,450 points. It looks as though BN could push up a little further to 9550-9600 by the settlement on some more short-covering.

However, the bullish trend is likely to be temporary and unlikely to last into May. Technically the likely situation is that BN will rise to 9550-9600 and then start to slide again. The upside is limited to a top of 9725, while there’s downside support at 9200-9300.

Even though it’s a small rise, it does have some negative effect on the entire financial sector. It will have some lagged, adverse effect on rate-sensitive sectors like real estate and automobiles, which are critical to continued economic recovery. There’s a case for going short on the May BN futures, which could ease once again to the 9200-level.

Among individual bank scrips, ICICI Bank and State Bank of India together represent about 55 per cent of bank sector’s weight. Positions in either tend to yield returns very similar to BN. Among the high-weight, liquid bank scrips, Axis Bank is high-beta and well-correlated to BN. Yes Bank (not part of the BN index) tends to outperform slightly so it could be a defensive cover as and when BN begins to fall.

Among non-banking financial institutions, IDFC, IFCI and Reliance Capital are liquid and high-beta. IFCI is a pure betting counter – the fundamentals are laughable. But it does offer exaggerated moves which often dwarf BN, so a brave trader can get in there. Reliance Caps has better fundamentals but it’s also high-beta. IDFC is less correlated to BN and may be genuinely bullish.

(The author is a technical and equity analyst)