Market Will Take Its Cues From RBI Monetary Policy - Epic Research

Mustafa Nadeem

Volatility dominates the expiry week with Nifty shredding 2.5% eroding its gains of almost last 5 weeks. The trading range which was established for last 5 weeks was seen breached with a long red candle. Nifty failed to sustain the crucial moving averages on the daily chart which were upholding the bulls sentiment. Nifty breached 20 and 50 days SMA consecutively which further indicates the bearish sentiment as no support was being held in a bulls trap.

The week started off with consolidations as Nifty struggled to breach 10400 on the upside. Despite positive cues from global markets and major global exchanges hitting fresh all-time highs Nifty was not able to breach 10400. A lot of events were expected on D street which was awaited for and same was observed with trading range as narrow as 50 points. It was basically writers play for initial days while volatility was absent. A sharp decline was seen in later half of the week with a cut of almost 200+ points despite an upbeat GDP data.

From derivatives front as well we observed volatility rising with strikes from 10200 - 10300 which were heavily written shift to 10100 while bulls were trapped on the higher side. The range shift from derivatives front indicates 10000 to be pivotal as the highest activity is now also seen increasing in December expiry to 9900 while on the upside we see 10300 as the decisive point.

The GDP numbers came better than expected at 6.3% which was its fastest pace in last three quarters. After a downward move from last 5 quarters, a reversal was the market with few sectors showing good signs of revival. The numbers were of very critical importance as a lot of information could have been discounted post structural changes like Demonetization and GST implementation. The numbers also reflected the momentum which we have seen being played out in some sectors like manufacturing, Auto, and consumption.

The impact we see is positive in a long-term since many sectors like Manufacturing, Auto, Infrastructure, and consumption may see a further boost. The data broadly shows that impact of structural changes in India is absorbed to some extent and it reasserts itself with the returns we have seen in the market in last few months. Manufacturing sector which saw a growth of 7% signifies the pickup in activity while consumption sector was also at a comfortable level of 6.5%. This shows the improvement and realignment of activities post GST implementation.

Fiscal deficit at 96% also put some lines on the head since lower revenue realizations were observed. What is critical at this point in time is rising crude prices which dominates the Indian basket which has a direct impact on a Fiscal deficit. Since 60$ mark is observed as the new average for 2017 and 2018 1st half, it may give some vibes to overall scenario.

With that, we have seen USDINR trading in a very small range from 64.2 on the downside to 65.2 on the upside. though a continuous fall is observed from last two weeks. Since continuous pick up in reserves along with pick up in investment in last quarters also reflect that dollar may feel further pressure. The pickup in Gross fixed - capital formation from 1.6% in first quarter to 4.7% in last quarter clearly shows that Rupee may further strengthen.

Positive comments from S&P and a rating upgrade by Moody's also will help Rupee to make smart moves in coming few weeks. 6.42 - 64.3 is the last area of support for Dollar as below that we see next move till 62.7 - 62.9 region.

A lot will be eyes on RBI monetary policy which is scheduled next week. The market will take its cues from there since a lot of space is now available for the RBI though we still believe any rate cut will be an over expectations. A lot of liquidity is already present in the market and that is what has been driving the whole momentum. Though, Finance ministry is expecting a one before March. RBI also has one meet due in Feb. We believe either way market will be discounting every possible word. The event that actually may have the highest importance will be Gujarat elections result as it will be pivotal for ruling party to set the tone for 2019.