Markets okay with 25 bps hike; but a hawkish RBI tone may trigger selloff

NEW DELHI: Benchmark indices pared intraday gains and cracked below their crucial support levels after Wholesale Price Index (WPI) for the month of November rose to 7.52 per cent, strengthening the case for the central bank to hike rates later this week.

WPI for the month of November rising to a 14-month high builds a strong case for the Reserve Bank of India (RBI) to hike rates by a minimum of 25 bps in its upcoming policy review on December 18, say analysts.

The repo currently stands at 7.75 per cent, while the marginal standing facility is at 8.75 per cent, maintaining a corridor of 100 bps. An interest rate increase will be critical in another respect: as a protection from the effects of the withdrawal of the stimulus of the stimulus programme by the US Federal Reserve.

The 50-share index closed at 6,154.70, down 13.70 points or 0.22 per cent. It touched a high of 6,183.25 and a low of 6,146.05 in trade today.

The S&P BSE Sensex ended at 20,659.52, down 56.06 points or 0.27 per cent. It touched a high of 20,764.52 and a low of 20,637.77 in trade today.

Indian markets corrected sharply after rising to historic highs last week on this euphoria post the election results. The three per cent-odd fall that we have seen from the highs of Monday to about the Friday has left a lot of people unnerved. It has begun to again question the strength of the rally.

According to analysts, the RBI's mid quarter review of monetary policy and the US Federal Reserve's meeting is likely to dictate the trend for the markets.

"We do not have the data which is very supportive right now (the CPI data and the IIP prints that came out last week). The market is beginning to price in a 25 bps rate hike," said Tushar Mahajan, Head of Derivatives, Nomura India.

"However, if there is a commentary of the RBI Governor that could lead the markets to crack up over the next two days, and then we may have some stability and dull trading days with strong support around the 50-day moving averages ... about 6140-odd levels," he added.

Apart from the rate hike, market participants will closely watch the future commentary by the RBI governor. And a hawkish commentary might lead to further weakness in markets, they say.

A rate hike of 25 bps is going to be absorbed by the markets without an adverse reaction or a bright reaction. If the rate hike is only 25 bps, we need to see what is the tone of the commentary of the RBI Governor - is it going to be too hawkish or dovish?

"Given the data point, it will be important for the markets to expect some kind of dovish commentary going forward from the RBI Governor," said Mahajan.

Mahajan is of the view that if the commentary continues to be hawkish, we could see the markets crack down below wherever they are trading then.

Analysts advise investors to tread with caution ahead of the two highlighting events due this week and if RBI slashes rates by more than 25 bps there is a possibility that Nifty may slip back to 6000 levels.

"If there is a 50 bps hike by RBI, in that case yes obviously there will be a huge negative reaction of 100-150 points Nifty cannot be ruled out," said Piyush Garg, Chief Investment Officer, ICICI Securities.

"It is always advisable to be cautious and there is no doubt about it; but, yes towards 6000 Nifty it is a decent entry level for the market," he added.

Investment ideas for 2014:

Tushar Mahajan, Head of Derivatives, Nomura India

We continue to like the cyclical space from a trading bounce per se. Given the correction, it is a space which one would want to take advantage of. On the large cap space, L&T still has the potential. If I am maintaining status quo on the RBI policy, then we could see L&T bounce back again to those 1150-odd levels that we saw it touch on Monday last.

On the banking space, we like the leading private sector banks, either Axis or ICICI. In case of the other public sector banks, barring SBI (given the fears of the QIP), we like PNB at the current levels.

Vineet Bhatnagar, MD, PhillipCapital

From the IT pack, TCS was looking stable and HCL Tech and Infosys were also looking alright. All of it is really on the back of the batch of economic data that is coming out from the US and Western Europe.

It is that period where one is anticipating a consistent good news that will come out, while there are still confusing signals that come out even from the markets like the US.

If the defensive comes back in fashion as far as the interest rates or QE tapering is concerned, then IT will take the front stage. Therefore, people are holding onto it, perhaps adding on at attractive prices if they decline a bit.

Viktor Shvets, Macquarie

"We remain underweight India & Indonesia. Whilst there are fundamental and tactical reasons, the keys are progress on domestic reforms, the timing and nature of decisions by CBs, and volatility in bond markets and capital flows.

We expect greater volatility in 1Q-2Q14, followed by anaesthetic liquidity later in the year. We would look to raise our weighting in India & Indonesia at the time of greater dislocation."