For the coming week, all eyes would be on the Reserve Bank of India's monetary policy, scheduled for Tuesday, before which indices are seen trading in a narrow range with a positive bias as investors maintain caution. Our base case (scenario is) that Governor Rajan cuts (interest rates by) 25 bps on Tuesday (and August) but signals a pause in June. A dovish scenario would be the RBI cutting key interest rates by 50 basis points and supporting more liquidity by reducing cash reserve ratio by 25 bps or increasing the open market operations. In our view, this (a dovish scenario) is a low probability event.
In the third situation, the sentiment may be weighed down by hawkish comments from RBI Governor
Raghuram Rajan, citing multiple risks to the RBI's 5% inflation target for 2016-17 (Apr-Mar), such as a possible third El Nino year or a rebound in oil prices, or a probable rate hike by the US Federal Reserve in June that may weaken the rupee. We see this (the hawkish outlook) as an even lower probability event as high lending rates have pulled down growth to an estimated 4.6% in the December quarter in the old GDP series. Banks and other rate sensitive sectors--capital goods, infrastructure, automobiles, and real estate--are likely to be in focus on account of RBI's monetary policy.
The index yesterday ended 0.2% higher at 16174.90 points on hope of a 25-bps rate cut by the RBI. We believe markets have factored in a 25-bps rate cut and will rise if the RBI cuts rates by 50 bps. Domestic markets are also seen taking cues from global markets, where investors are grappling with fears of a slowdown in world economy and central banks' measures to ease monetary policy which are not seen having much effect. Domestic benchmark indices declined yesterday, tracking weakness in the global markets. Sentiment world over was hit as a reading of Tankan survey of manufacturers' sentiment by Bank of Japan for Jan-Mar halved on quarter, raising concerns that the central bank's negative interest rate policy was doing little for the country's growth.
The Nifty 50 and the S&P BSE Sensex ended down 0.3% each at 7713.05 points and 25269.64 points, respectively. The automobile sector would also be in focus as many companies report their sales numbers for March. Post market hours yesterday, Tata Motors reported its total sales of 53,057 units, which were up just 1% on year. Stocks of Tata Motors ended down 1.8% at 379.65 rupees.
Among the defensives, pharmaceutical stocks are seen trading with a negative bias next week on account of regulatory concerns surrounding many companies.
