RBI's Monetary Policy Review To Weigh On Nifty, Sensex; Petrol Price Cut Likely To Inject Optimism

The impact of Reserve Bank of India's (RBI's) monetary policy announcement on Wednesday is likely to determine the trajectory of benchmark market indices: Sensex and Nifty. The central bank will announce its second monetary policy review for 2018-19 wherein it is expected to change the policy stance to hawkish, or even raise the key interest rates. A Reuters poll of nearly 60 economists showed the RBI will change its policy stance in June policy and will increase the repo rate by 25 basis points to 6.25 per cent in August. "Given the higher GDP growth rate released last week, the chances of a policy rate hike has risen, though not assured, as RBI would take a wait-and-watch approach," Devendra Nevgi, founder and principal partner, Delta Global Partners, said. "A rate hike, if it comes accompanied by hawkish policy language, would hit the market sentiment, especially the banks and the NBFCs."

The expectations of the shift in RBI's policy stance are attributed to the fact that annual consumer price inflation (CPI) accelerated in April to 4.58 percent, which is considerably above the target of 4 percent for the sixth month in a row, after easing in each of the three previous months.

The first two days of the markets are likely to stay subdued in run up to the RBI policy. However, whatever the RBI decides, the market indices are likely to react positively or negatively depending on the rate cut or rate hike, respectively. 

As a matter of fact, market experts believe that the market's upside has, by and large, now been capped.

"The markets are already at the two-year highs. Also, when the government bond yields are trading at 8 per cent yield, the scope of equity market going up is very limited," said Manomhan Bharti, CFA, and an equity markets expert.

He further adds, "Indian markets, just as other emerging markets, are in a sell-out mode. The trend of quantitative easing has started reversing now. And the new trend is likely to continue."

Declining Fuel Prices To Add To Market Cheer
Another factor that will weigh on the direction of market is the crude oil and domestic oil prices. In case of a rate hike, the market fall might be arrested from the cut in petrol and diesel prices. The oil marketing companies (OMCs) have been cutting the petrol prices for five consecutive days, which cheered the markets last week. On Saturday, petrol prices were cut for the fifth consecutive day by 9 paise to Rs 78.11 in Delhi.

It is noteworthy that Sensex of the BSE rose by 302.39 points or 0.87 per cent to 35,227.26 points last week while the wider Nifty50 of the NSE closed the week's trade higher by 91.05 points or 0.86 per cent.

However, what had added to the market optimism last week, apart from rupee's rise and falling fuel prices, was the higher-than-expected GDP growth data, which was released on Thursday after the market hours. The GDP grew by 7.7 per cent in the March quarter (Q4) and by 6.7 percent for the fiscal 2018. The rupee also rose, and had strengthened by 72 paise last week to close at 67.06 against the US dollar.

Optimism Still Persists
However, despite the RBI's stance that is expected to be hawkish, technical traders still expect bullishness in the markets.

"Technically, the Nifty seems to have taken a breather after two sessions of gains. With the underlying trend remaining up, the bulls seem to have an upper hand for the coming week. Further upsides are likely once the immediate resistances of 10,765 points are taken out. Crucial supports to watch for any weakness are at 10,620 points level," said Deepak Jasani, head of retail research for HDFC Securities. (With IANS inputs)