Signal amid event heavy week.

Last week Nifty traded sideways with week on week decline of 0.48%. First half of the week was volatile and down owing to state election result though smart rally of nearly 2% on Friday helped erase most of the losses for the week. Rally on Friday was on account of strong global cues. These global cues may give us support here and there but by and large March will be the month when domestic issues will determine the course of the market.

In between, RBI reduced CRR sharply by 75 bps. This CRR cut should be considered more as liquidity management act than any indication of rate cut. Owing to government’s enhanced borrowing program to meet higher fiscal deficit, monetary liquidity was very tight. Short term interest rate lately has moved sharply up above 9.5%, in fact inter-bank CD rate was ruling at 10.2%.

This CRR cut move by RBI will have some impact on short term rates; we do not think bond yield will come down because of this measure. A rate cut in forthcoming RBI credit policy can only ensure rate easing for long term lending and borrowing. And as we have said earlier, market requires rate cut to make our fundamental attractiveness improve.

Another related important data point in this direction is, that how will rupee behave with the commencement of easing by RBI. In fact our short term market direction assumption for this week is all based on how rupee behaves this week. There will be lots of information floating around this week due to budget and credit policy and at times these will be confusing for short term trades. Amongst these conflicting news and views, short term traders should keep an eye on rupee movement which will act as a signal as far as short term direction is concerned. A depreciating rupee will mean fall for the market whereas appreciation in rupee will mean rally.

For Long term investors, outcomes of these events should be used only in the sense of allocation to various sectors. A negative outcome will require investors to add weightage to IT and consumer staples and positive outcome will require adding weight to Financials and Industrials.

Our stock specific recommendations in these sectors are :

Among large PSU banks, we like SBIN, in mid PSU bank we prefer ALBK and among small PSU banks our investment pick is SYNDIBANK.

Among Pvt. Banks, ICICIBANK is our preferred stock in large cap, and YESBANK and Southbank in mid and small respectively.

Among NBFCs we like PFC and IFCI.    

Technically, market going above NIFTY level of 5393, which is near the high made on the day of state election result, is a critical level. Closing above this level will be positive for the market.

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