Stocks in rate sensitive sectors like real estate, auto stocks witnessed selling ahead of the RBI monetary policy announcement, while banking stocks gained marginally even as several brokerage houses expect RBI to adopt a hawkish tone in the coming monetary policy.
Brokerages firms feel that given the sharp liquidity dip in banking, growing inflation and concerns of fiscal slippage would force RBI to hold rates and it could sound more hawkish on its stands.
Amar Ambani, Partner & Head of Research, IIFL Investment Managers, said,
"We expect RBI to sit tight on the monetary policy, with no rate move expected for at least the next two quarters. There is a possibility of the central bank adopting a relatively hawkish tone given the sharp liquidity dip in banking, growing inflation and concerns of fiscal slippage," he said.
According to experts, liquidity could suffer even more given the traction in lending activity during the second half of this fiscal year.
The market remained cautious ahead of the policy announcement with selling emerging in real estate and auto stocks that are sensitive to lending rates.
While the Nifty Auto and the Nifty Realty indices ended lower by 0.5 per cent, the Nifty Banking Index rose marginally as stocks like SBI, PNB, Yes Bank and Federal Bank gained 1.5 per cent to 2 per cent.
The market players will be closely watching the tone of the policy guidance that could be divided between a neutral or a hawkish bias.
Experts feel that inflationary risks and firm 2Q FY18 growth numbers provide the central bank with sufficient justification to sound cautious.
DBS Bank expects guidance to sound cautious but not outright hawkish. "Markets are currently pricing in two-three rate hikes in the year ahead; we however don't believe rate hikes are likely in this timeframe, given our benign inflation forecast," Radhika Rao, India economist, DBS Bank, said.
On the inflation front, CPI is poised to surge above 4 per cent in the coming months, influenced by higher oil and food prices. Low base effect and HRA hike (7thPay Commission) could raise core inflation while higher government spend and deviating fiscal deficit target could translate into inflationary risks.
Although GST tax cuts on consumer goods, light electrical and home building items can provide some relief to consumers, a rebound in economy and rise in household consumption will stoke demand-side price pressure.
According to a Kotak Securities report, "With inflation trending up, lack of clarity on fiscal stance, higher Brent and UST yields, etc, offer little for RBI to loosen it policy stance in the coming policy. We expect RBI to keep the cautious tone intact. For this week, we expect the 10-year yield to trade in the wide range of 7.05 per cent-7.15 per cent during this week."
"This monetary policy will be keenly watched for the stance of the policy more than the action taken (which is largely expected to be status quo). This policy comes at a time when crude prices have inched up, GDP growth has bounced back post-GST impact, and US prepares to resume its normalising of rates activity. Yields in the bond market have already hardened by 25-30 bps post previous policy and market mood would continue to remain apprehensive till policy decision. Deposit rate hikes by couple of PSU banks also would continue to weigh on market sentiments as liquidity continues to remain tight," said Lakshmi Iyer, CIO (debt) & head-products, Kotak Mutual Fund.
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Financial Chronicle