RBI may go for rate cut in February: Moody's

“We expect Wholesale Price Index (WPI) inflation to cool a little in the coming months... We expect WPI inflation to ease toward 6.5% by mid-2012,” Moody's Analytics said in its report, ‘India: Wholesale Price Index’

New Delhi: Global ratings agency Moody’s has said inflation in India is likely to moderate to around 6.5% by the middle of this year and the Reserve Bank of India (RBI) may go for interest rate cuts by February, reports PTI.

“We expect Wholesale Price Index (WPI) inflation to cool a little in the coming months... We expect WPI inflation to ease toward 6.5% by mid-2012,” Moody's Analytics said in its report, ‘India: Wholesale Price Index’.

According to the agency, while inflation is on a downward trend, the month-on-month fall in January is not likely to be as steep as was witnessed in December 2011.

Headline inflation fell to a two-year low of 7.47% in December from 9.11% in November. The moderation was mainly on account of cheaper food items.

Food inflation has been in the negative zone since mid-December on the back of a steep decline in prices of vegetables, particularly potatoes and onions.

“We were honing in on a March rate cut, but this latest inflation cooling may give the RBI sufficient reason to move before then. The Indian economy is slowing sharply and with inflation coming off its peaks, there’s no reason for the RBI to continue sitting on their hands,” Moody’s said in its report.

“Look for an initial rate cut in February,” it added.

The central bank had hiked interest rates by 375 basis points between March 2010 and October 2011 to deal with persistently high inflation.

However, in its last review in December the RBI pressed the pause button on its monetary tightening strategy and said that it might go for rate cuts in the future if inflation moderates further.

At the same time, the RBI is confronted with a moderation in economic growth. The government has cut its FY11-12 growth projection from 9% to about 7% for the current fiscal.

The central bank is scheduled to conduct its third quarterly review of the monetary policy on 24th January.

However, experts feel RBI will refrain from cutting rates this time.

The RBI need not wait for the March mid-quarter review for announcing a change in the monetary policy and can go for a rate cut at any time.

“... There are still pipeline pressures that need watching, as indicated by the solid rise in non-food prices,” Moody’s said.

Inflationary pressure continues in manufactured items, which have a weight of over 65% in the WPI basket.

Prices of manufactured products went up by 7.41% year-on-year in December, as against 7.70% in the previous month.

 

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Small reversal possible: Weekly Market Report

Nifty may move in the range of 4,950 and 5,085

Positive earnings reports from domestic corporates, lower inflation numbers and supportive cues from the global arena helped the market close higher for the third week in a row. While the benchmarks closed 4% higher in the week, all eyes will now be on the Reserve Bank of India’s 24th January quarterly policy review.

The Sensex settled 584 points higher at 16,739 and the Nifty closed the week at 5,049, up 183 points. The Nifty is likely to move in the range of 4,950 and 5,085.

The market opened lower on Monday following the nine-nation sovereign downgrade by S&P over the weekend but settled higher on late buying. Global cues and a positive set of earnings reports helped the market close with gains on Tuesday.

Domestic growth concerns and the World Bank’s cut in global growth forecast saw the market snapping its four-day winning streak on Wednesday. However, the market went on to close in the positive on the last two trading days as earnings reports continued to meet market expectations.

Among the sectoral indices, BSE Realty jumped 8% and BSE Oil & Gas surged 6% while BSE Fast Moving Consumer Goods index lost 1%.

The top Sensex stocks in the week were Maruti Suzuki (up 13%), Sterlite Industries (up 10%), Tata Power, Bajaj Auto and Hero MotoCorp (up 9% each). The main losers were Mahindra & Mahindra (down 5%), ITC (down 3%), TCS and Cipla (down 1% each).

The key gainers on the Nifty were Reliance Infrastructure (up 17%), Maruti Suzuki (up 13%), IDFC, Jaiprakash Associates (up 11% each) and Sterlite Ind (up 10%). M&M (down 5%), ITC (down 3%), Dr Reddy’s, SAIL and TCS (down 1% each) were the main losers on the index.

Encouraged by a dip in December inflation, the finance minister projected March-end numbers at 6%-7%. Headline inflation fell to a two-year low of 7.47% in December 2011 from 9.11% in the previous month.

India’s exports rose an estimated annual 6.7% to $25 billion in December while imports for the month were at $37.8 billion, resulting in a trade deficit of $12.8 billion, trade secretary Rahul Khullar said on Monday.

Besides, food inflation remained in the negative zone for the third straight week, at (-) 0.42% for the week ended 7th January from (-) 2.90% in the previous week. However, experts feel that the decline in prices of food articles will not be enough to prompt the RBI to cut key interest rates at its forthcoming monetary policy review on 24th January.

In a major boost to M&A deals, the Supreme Court on Friday set aside the Bombay High Court judgement asking Vodafone to pay income tax of Rs11,000 crore, holding that tax authorities do not have jurisdiction on an overseas transaction. However, immediately after pronouncement of the SC ruling, finance minister Pranab Mukherjee and law minister Salman Khurshid held consultations on the issue.

Although the issues relating to taxation of overseas deals are likely to be resolved with implementation of the Direct Taxes Code (DTC), in the Vodafone case the government has an option to either file a review petition or effect legislative changes.

On the global front, Greece is working on an initial deal with private bond holders that would help it from a debt default. The deal is expected to pave the way for a fresh aid package before bonds worth 14.5 billion euros ($18.5 billion) come up for redemption in March.

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The Nifty has completed key targets hence book profits in any further rise

Investors are advised to be cautious for creating fresh longs and on the contrary advice to book profits in any rise from here on as the market is expected to become volatile and a decline is likely early into the new F&O settlement

S&P Nifty close: 5048.60    

 
Market Trend
Short Term Up            Medium Term Down            Long Term Down


The Nifty opened flat and after a one-day pause and rallied smartly to hit the R2 level of the week of 5,023 points as well as almost completed the 61.8% retracement of the decline from 5,399-4,531 points, pegged at 5,068 points. Thus the Nifty rose for the third consecutive week notching a handsome gain of 182 points (+3.75%). Volumes during the rise were almost equivalent to the previous week. The sectoral indices which outperformed were BSE Reality (+7.97%), BSE Oil & Gas (+6.43%), BSE Bankex (+5.94%), BSE Capital Goods (+5.49%) and BSE Auto (+4.17%) while the gross underperformers were BSE FCMG (-0.19%), BSE IT (+0.32%) and BSE Healthcare (+0.67%).   

The weekly histogram MACD has moved above the median line implying that the short-term trend has turned up even though the intermediate term trend remains down. The recovery continued on good volumes indicating strength. Those who created fresh longs in dips, as advised, should be cautious in any further advance from current levels as the risk/reward ratio is now becoming even. Therefore, one should look out for booking profits in further rallies as a decline is expected during the end of this calendar month. Alternatively one should raise his stop loss on positional longs to 4,979 points (for this week) and from a trading perspective to 5,004 points for Monday.

 Here are some key levels to watch out for this week
  • As long as the S&P Nifty stays above 4,979 points (pivot) the bulls can breathe easy and the onus is on the bears to pull things back.
  •  Support levels in declines are pegged at 4,895 and 4,742 points.
  • Resistance levels on the upside are pegged at 5,133 and 5,217 points.

Some Observations
1.    The bulls have succeeded in driving prices higher which have now we have reached the minimum target area between 5,023-5,070 points (Fibonacci target if one takes into cosideration the rise from 4,531 to 4,800 and the subsequent higher bottom of 4,588 points)
2.    This corrective rise has now come very close to 5,068 points (61.8% retracement levels of the fall from 5,399-4,531 points) hence one should be cautious in rallies from here on.
3.    A significant short-term top is already in place or is likely this week and one should book profits around the 24th-27th January 2012 from where we are expecting a sudden bout of selling to take place.

Strategy
After a brief one-day pause, the Nifty rallied smartly but covered slightly more ground than was anticipated for this week. However, it has fitted perfectly into the picture we had visualized of the market going strong into the Futures and Options (F&O) settlement expiry due this week. We advocate caution for creating fresh longs and on the contrary advice to book profits in any rise from here on as the market is expected to become volatile and a decline is likely early into the new F&O settlement.

(Vidur Pendharkar works as a consultant technical analyst & chief strategist, at www.trend4casting.com)

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