Market course hinges on RBI’s decision on interest rates; Pre-Budget rally likely in Feb

Opened higher than the previous week's closing and then rose to the second best level of its career. But failed to maintain an ebullient mood till the end of the week and still ended with a nominal gain of 305 points above the previous week's closing. That was how the most popular stock market index, the BSE Sensex for 30 scrips, performed last week, the first ever bullish week of 2014. The rally staged by the market barometer was not supported by a wide majority of traded stocks as the bluechips and leading ones met with bear hammering and mid-caps and second rung counters, with profit-booking. The Sensex's rally last week was based only on a few select scrips and, therefore, appeared more prone to fizzling out soon in the absence of any major positive news or clues.

The Sensex which had closed the previous week at 20758, opened the week under review at 20855 and scaled to a second best level of 21379 as on Thursday but lost its momentum on Friday when the markets plunged after IT major TCS's Q3 numbers fell short of the market expectations. TCS's results for the quarter ended December, 2013, turned out to be excellent but the marketmen expected more than that and the resultant disappointment caused off-loading in banking, automobile and IT stocks. As result, Sensex managed to post gain of only 305 points last week.

The week that went by began with hopes of Reserve Bank maintaining status quo on interest rates in its review meeting scheduled for January 28. In addition, inflation numbers have softened, but manufacturing output fell drastically. These twin developments may prompt the apex bank to either maintain status or go for cut in the interest rates. As inflation has been the main concern of Reserve Bank, the easing of inflation will prevent RBI from taking harsh decision on interest rates in future. The IIP numbers in November dropped to negative 2.1 per cent which meant that it was the high interest regime that has dented the industrial growth. The Reserve Bank is, therefore, expected to take care of the industrial growth as the inflation has already eased away.

The markets in the first four trading days gained 507 points but the last day's erosion of 202 points has left them with only 305 points over the previous week's closing. The corporate number season is progressing well and most of the leading companies have come out with better or excellent performance for the quarter ended December but the markets have not fully responded to such excellent performance and instead, entered a correction mode with TCS going down even after the company showing a 50 per cent rise in its net profit for the period, which means any poor or lesser than expected numbers by any company may send the markets further down as no other positive of bullish factors are not being seen on the horizon.

It is, therefore, very likely that the markets may remain calm in the new week and move or fluctuate in a narrow range prior to the outcome of the Reserve Bank's monetary policy meeting on January 28. The RBI may spring a surprise by not only maintaining the interest rate but also proposing a cut of 25 basis points to revive industrial growth under political pressure. In case the central bank opts for a rate cut, then the markets could flare up and the Sensex may even cross the previous life-time peak of 21484 it established in December, 2013. Thus, even though there would be no regular budget this time, a customary pre-budget rally may emerge on or after January 28.

The Parliament session for presentation of vote-on-account is slated from February 5 and the vote-on-account would be taken on February 17. It would be during this period that the markets could be expected to enter a long lasting trend which could be positive. Therefore, those investors wishing to take advantage of the next and major bull market, should start accumulating shares of their choice from the new week onwards. The only point they should keep in mind is, the choice should not be very wide and must be restricted to a few leading and fundamentally sound companies. The penny stocks and loss making companies must be avoided completely.