RBI monetary policy: 6 things to watch out for on Wednesday

The central bank has maintained the status quo on its repo rate since August 2017, citing concerns about inflation.

  

The Reserve Bank of India's Monetary Policy Committee (MPC) is meeting for its second bi-monthly policy review in FY19. This is the first time the committee is meeting for three days instead of the regular two days.

Some experts expect the MPC to revise the benchmark repo rate upwards. Repo rate is the rate at which banks borrow short-term funds from the RBI.

Here are 6 things to watch out for in Wednesday's monetary policy announcement:

Change of stance

Observers feel that the MPC may shift its stance on liquidity to hawkish from being neutral earlier. This could be in preparation for a hike in August, if rates are not hiked on Wednesday.

Experts are expecting a higher probability of key repo rate remaining unchanged at 6.00 percent, and a shift in stance from 'neutral' currently to 'withdrawal of accommodation' by the MPC.

The central bank has maintained the status quo on its repo rate since August 2017, citing concerns about inflation.

GDP growth

The Indian economy grew at 7.7 percent in the January-March quarter and helped India retain the tag of the world's fastest-growing economy. In its previous meeting, the committee had noted that the economy was expected to grow at faster pace in FY19 due to several factors.

Inflation

RBI's commentary on inflation will be watched closely on Wednesday. Observers are expecting the central bank to revise consumer inflation projections.

View on rising fuel prices

The MPC is expected to talk about the escalating prices of petrol and diesel, caused by the global increase in crude oil prices.

MPC voting pattern

In April, the RBI Deputy Governor Viral Acharya had indicated that he would vote to withdraw monetary accommodation in the next policy. Michael Patra had voted in favour of raising the repo rate.

The others had overruled Patra by voting to maintain the status quo. It would be interesting to see how the MPC members vote on Wednesday.

Views on US Fed rates

RBI Governor Urjit Patel said on Monday that the US Fed should reduce the pace at which it is unwinding its balance sheet, in order to limit the impact of a shortage of the dollar in emerging markets.

Patel said that the Fed should carefully adjust the pace, keeping in view evolving macroeconomic conditions.

The committee's observations on the US Fed's decisions on interest rates will be another thing to watch out for in Wednesday's policy announcement.

MORE WILL UPDATE SOON!!

Top 10 stocks which could get impacted the most if RBI goes for a rate hike

A rate hike is something which might not be taken in a positive light by most of the sectors.

  

Mark participants are eyeing the outcome of the Reserve Bank of India's Monetary Policy Committee (MPC). The Street has more or less discounted a rate hike of 25 bps and a change in stance by the central bank.

This is the first time the committee is meeting for three days instead of the regular two days. Some experts expect the MPC to revise the benchmark repo rate upwards from current 6 percent.

Repo rate is the rate at which banks borrow short-term funds from the RBI.

Observers feel that the MPC may shift its stance on liquidity to hawkish from being neutral earlier. This could be in preparation for a hike in August if rates are not hiked in the June meeting.

A rate hike is something which might not be taken positively by many sectors. Stocks in sectors like consumption, consumer durables, banking and real estate will be impacted the most, along with rupee and bond market.

The impact of rate hike by the RBI (if not in June then in the August meeting) will just hit the sentiment of the inventors. As said earlier, if RBI becomes more hawkish, there will be an impact on all the sectors; however, the intensity of the impact will be different. Sectors such as Banks, FMCG infrastructure, real sector and automobile, to name a few, are expected to see some impact.

A rate hike in coming months, if not in June, seems inevitable as global central banks, be it the US or other emerging markets are on interest rate hiking trajectory. Obviously, hike in interest rate by RBI would impact banks’ lending, capex, rupee and bond markets.

Aggarwal further added that a rate hike is unlikely to immensely affect lending rates, because banks such as SBI, HDFC, and Axis Bank have raised borrowing costs even before any central bank action.

Rupee, which has been witnessing downside trend, may get a relief from the rate hike. Off late, Indian bond markets have witnessed its worst selloff where FIIs were smart enough to pull out money and place it in other Asian economies like Indonesia and Philippines, suggest experts.

A 25 basis points rate hike in August is more or less discounted in the bond market hence, only a higher than 25 basis points (bps) hike will trigger fall in bond market considering this an unusual and aggressive stance by the Reserve Bank of India.

Rupee has been moving largely due to demand-supply factors, it has a good integration and correlation with the bond market. The fall in rupee is more related to crude and gold prices than rate hike by RBI at this moment.

Commenting on sectors in specific Mittal said, a rate hike would hit demand for two-wheelers, credit demand for the banking system and realty will become unattractive due to rise in lending rates.

We have collated a list of ten stocks from different experts which are likely to get impacted the most by a rate hike by the Reserve Bank of India (RBI):

DLF & Indiabulls Real Estate:

As real estate stocks are directly impacted by a rate hike and are considered as most sensitive ones to the changes in key rates stocks like DLF and Indiabulls Real Estate will be impacted in a negative way slowing down the growth rate.

The cash flow of DLF remained weak and there was also a major change in the profit of March’18 which came at Rs.37.7 crore as compared to Rs.4110.2 crore in December 2017.

Axis Bank:

The results of Axis bank were not impressive as the Gross NPA rose to 6.77 percent of the total loans at the end of the March quarter, from 5.28 percent in December.

The net NPA ratio worsened to 3.4 percent from 2.5 percent sequentially. And, now the rates are expected to increase it would be very tough for the stock to sustain at the current market rate.

State Bank of India:

SBI also gave negative results for the quarter ended March. The asset quality worsened because of fresh slippages which shot up to approximately 7.2 percent. The country’s largest bank reported a second consecutive net loss of Rs 7,718 crore for the March quarter, primarily due to a surge in provisions and bad loans.

IndusInd Bank:

The gross non-performing assets rose 14 percent sequentially in absolute terms to Rs 1,705 crore. Provisions for bad loans also increased to Rs 335 crore in March quarter, compared to Rs 236.2 crore in the previous quarter.

Hero MotoCorp & TVS Motor:

Both the two-wheeler names depend on finance to boost sales. Most of the two-wheelers are bought on finance and hence any increase in interest rate will certainly lead to lower sales.

Indiabulls Housing Finance & DHFL:

Housing EMIs forms a large portion of household spend and thus new consumers will certainly defer their decision of buying a home in case of a rate hike.

Indiabulls Housing & DHFL has grown at a very fast pace in recent years and rate hike will certainly put brakes on advances growth for the company.

L&T:

The company is the largest EPC player in the Indian infrastructure space. If RBI hikes interest rates than we may see a slowdown in the infrastructure sector and will result in drying up the new order wins for L&T.

Market is haemorrhaging, but Sensex & Nifty seem to suggest rude health

The big indices have retreated just 5-6 percent from their peaks, but the price damage in mid and small cap shares has been severe.

  

Many investors would be surprised to see the erosion in their portfolios despite the Sensex and Nifty not being too far from their lifetime highs. The big indices have retreated just 5-6 percent from their peaks, but the price damage in mid and small cap shares has been severe.

Here are some data points that describe the carnage in the market on Tuesday, June 6th. During the day, trading in 381 stocks on the BSE was frozen after there were only sellers in those stocks. Nearly 700 stocks, or one in every four stocks are trading within 5 percent of their 52-week lows. Sector indices that are close to their lows are power, telecom, infrastructure, utilities, healthcare and public sector undertaking.

There are various reasons why many these stocks are being hammered. In many cases, weak fundamentals are to blame. But market players say the recent policies and regulations by the government and market regulator SEBI are aggravating the situation.

The introduction of long-term capital gains tax from February 1 had many investors rushing to book profits mainly for tax considerations. Soon after, mutual funds began selling shares of smaller companies because the regulator introduced a new system of classifying stocks bought in the various schemes. Last week, SEBI tightened margin requirements to curb speculation and this has resulted in a new round of selling.

The retail investor is left wondering if the regulator is there to save them, who will save them from the regulator.

For someone who follows only the Nifty and Sensex as a gauge of market sentiment, the meltdown is not visible. A handful of stocks are giving the impression that all is well in the Indian markets.

The top five stocks in Nifty 50 account for a third of the market capitalization of the indices. Around 15 stocks have a weight of less than 1 percent of the index. In other words, the indices are like a Doberman, which will not be affected much even if the tail is chopped off. Nine of the top 10 stocks are trading close to their 52 week high levels. The only high market cap stock which is away from their highs is SBI.

An index is supposed to reflect the health of the market. Our indices are currently so skewed that they do not reflect the sickness that has spread to most of the market.

The purists might say that it is the nature of the beast where the top companies in terms of market capitalization will account for the bulk of the weight of the index. The index is expected to represent the health of a major portion of the market, but this is nowhere near the truth.

It is like taking a financial health of India by looking at the net-worth of top 10 richest Indians. For the common Indian, like a market investor, this is not even funny.

MORE WILL UPDATE SOON!!

See Nifty trading in a 10,200-11,000 band in June series

On the daily chart, immediate support for the Nifty is placed around 10,537 (50-day daily moving average) and 10,440 levels (50 percent retracement of its March to May upmove), whereas 10,699 (23.6 percent retracement of its March to May upmove) will act as immediate resistance.

  

The Nifty ended Tuesday highly volatile session on a negative note at 10,593.15, down 0.33 percent. Bears continued to exert pressure on domestic markets in the early noon session ahead of the Monetary Policy Committee meet.

Market sentiments remained weak with Commerce and Industry Minister Suresh Prabhu’s statement that unilateral trade restrictive actions by some developed countries could derail the fragile global economic recovery, which in turn would have implications on the job scenario.

Besides that, the BSE placed additional surveillance measure on numerous midcap stocks, which led to a sell-off in smallcap and midcap stocks.

On the daily chart, immediate support for the Nifty is placed around 10,537 (50-day daily moving average) and 10,440 levels (50 percent retracement of its March to May upmove), whereas 10,699 (23.6 percent retracement of its March to May upmove) will act as immediate resistance.

The relative strength index (RSI) on the daily chart is placed at 48.25 which is showing a downward momentum. Moving Average Convergence Divergence (MACD) is trading above the zero line with a negative cross, which indicates that the bias could remain bearish for the next few trading sessions.

India VIX ended down 4.09 percent at 13.31. A decrease in VIX suggests limited downside and a consolidated upmove in the market.

On the options front, maximum call open interest of 45.51 lakh contracts is seen at strike price 11,000, followed by 10,700, which now holds 33.89 lakh contracts. Maximum put open interest of 35.68 lakh contracts is seen at strike price 10,200, followed by 10,600 which now holds 34.76 lakh contracts.

As per the options data, immediate support is seen around 10,600 and 10,200 levels, whereas immediate resistance is seen around 10,700 and 11,000, which will act as stiff resistance in the June expiry.

Here are two stocks which could give 4-10% return in the short term:

Sanofi India Ltd: Buy| Close: Rs 5,068.35 | Target: Rs 5,335 | Stop loss: Rs 4,880 | Return: 10.89%

The stock has given a breakout above its downward trend line around Rs 5,038-5,045 levels on Tuesday on the daily chart which suggests bullishness in the stock.

A daily momentum indicator Relative Strength index (RSI) reading at 63.32 level, showing positive momentum and MACD trading above zero line with positive crossover whereas (+) DI continuously trading above (-) DI.

Based on the above observations, the trader can buy the stock around in dips around Rs 5,040-5,050 with a stop loss below Rs 4,880 (closing) for the target of Rs 5,335

Axis Bank Ltd: Buy| Close: Rs 530.90 | Target: Rs 510 | Stop loss: Rs 551 | Return: 4.85%

The stock has given breakdown from symmetrical triangle pattern around Rs 536-537 on Tuesday in the daily chart with moderate volumes.

The Daily Relative Strength index (RSI) breakdown its 21 days average and showing downward momentum and MACD trading with a negative cross above zero line, which indicates that stock likely to move downward further.

A trader can sell the stock after some technical bounce around Rs 536-538 with a stop loss above Rs 551 (closing) for the target of Rs 510.

MORE WILL UPDATE SOON!!