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RBI policy move holds the key

RBI policy move holds the key
Highlights

Buy on declines, bullish trend likely to remainA After staging a major surge of 764 points in the preceding week, the BSE Sensex beat a retreat of...

Buy on declines, bullish trend likely to remainA gosarAfter staging a major surge of 764 points in the preceding week, the BSE Sensex beat a retreat of 256 points last week amid concerns that RBI might not go for rate cut. The media reports alleging involvement of some private banks in money laundering and sharp decline in auto sales also concerned bull operators who off-loaded their long positions partially to book profit. It may recalled that clarifications made by Finance Minister P Chidambaram on taxes related to foreign investments and positive vibes from the US markets made Sensex surge forward by 764 points in the week ended on March 8. Last week, the trading on the Indian stock bourses, however, commenced with cautious approach on Monday because of the uncertainty prevailing with regard to a rate cut by the Reserve Bank of India in it its monetary policy review meeting slated for March 19. The apex bank's Governor D Subbarao had already hinted that inflation rate prevalent over 7 per cent was too high and therefore it would not be possible for him to oblige trade and industry with any more rate cut in near future. On the other hand, the Finance Minister and Prime Minister have both hinted at a possible rate cut to boost the sagging industrial production in the country. Incidentally, the numbers released pertaining to industrial production and also the inflation has turned out to be in favour of the RBI Chief who is known for his tight money policy for the past over two years. The industrial production rose a bit in January whereas inflation for the February was stubbornly high. It was due to these numbers that the markets turned cautious with bulls off-loading last week. The Sensex which had closed at 19683 points in the preceding week opened the new week on Monday almost flat at 19680 and immediately surged to a post budget new high of 19680. However, increased offerings from the bull market operators and domestic institutional investors forced it to beat a retreat until it touched a low of 19179 on Thursday. On Friday, though the markets closed with a loss of 143 points for the day, the Sensex shed 256 points. However, the premier index still maintained 566 points lead when compared with the budget day closing of 18862 points. Thus, the markets have continued to be in an uptrend in the post budget era. Since the tone of the markets has turned cautious over the RBI's monetary policy review scheduled for Tuesday in the new week, it is most likely to witness business volume at low ebb and price fluctuations narrow but tilt still being in downward direction. But from Tuesday onwards, they may trend in line with the RBI's decision in regard to the interest rate and ratios like CRR and SLR. The RBI had last cut the interest rate by 25 basis points even though the inflation rate was not very comfortable as per the RBI Governor. Therefore a further rate cut of similar proportion is also likely in the next review this week. Besides, the Finance Minister himself has hinted at a rate cut and therefore he may prevail upon the RBI to toe the line. In case, the RBI cuts interest rate by 25 basis points, the markets are most likely to re-assume their uptrend and the Sensex may cross the last week's post budget peak of 19755 and head towards 20,000-plus mark once again. If the RBI disappoints, then the markets may fall further down, but the Sensex would not go below the last week's low of 19179 as the primary trend is still bullish based on future hopes. It is therefore advisable for the true investors to adhere to their long term investment ideas and be on buying side whenever there is a sharp decline.
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