RBI monetary policy review to set tone for stock market

The Reserve Bank of India, headed by D. Subbarao, will review the mid-quarter 
monetary policy on December 18. PHOTO: AP

The biggest driver this week would be the expectation that the Reserve Bank of India (RBI) in its mid-quarter monetary policy review on December 18 would cut interest rates, which will cause some volatility. 

The second driver would be that having won the foreign direct investment (FDI) vote in both houses of Parliament, the government would continue to push reforms. Important Bills like Companies Bill, Competition Bill and FDI in insurance and pension sectors would be put up for debate this Winter Session.

Besides, inflation and Index of Industrial Production (IIP) data would also determine the market course. Investors will expect further momentum in reforms.

The FDI debate in Rajya Sabha received an unexpected boost when the Bahujan Samaj Party (BSP), which had walked out from Lok Sabha, decided to vote with the United Progressive Alliance (UPA) in the upper house.

This helped the markets make a significant reversal on Thursday and helped the markets end on a positive note last week.

There are two significant observations about the previous week's trading, where Midcap and Smallcap indices significantly outperformed the Sensex and Nifty. 

Secondly, there seems to be interest being generated in the banking sector, and the BSEBANKEX is now within striking distance of its all-time high made in November 2010. The movement of the BSEBANKEX would give clues about the RBI meet and also which way the markets would move.

There could be some profit booking following the gains made in the last two weeks.

Foreign institutional investors (FIIs) continued to be big buyers and bought stock worth Rs 5,100 crore. They have bought stock worth Rs 1.1 lakh crore this week.

Domestic institutions sold shares worth Rs 1,455 crore last week and Rs 16,700 crore in the year. Clearly, FII inflow has made India one of the best-performing markets globally but is no longer cheap on valuations.

This valuation point should be borne in mind when taking fresh positions going forward. With Christmas round the corner, FII activity would drop significantly in the coming days.

The initial public offering (IPO) market will see lot of action. 

Rating company CARE is offering 72 lakh shares in the price band of Rs 700-Rs 750 by way of offer-for-sale to raise Rs 540 crore. The share is reasonably priced compared to its listed peers Crisil and Icra. The issue is receiving excellent support and would be very heavily subscribed.

The second IPO is from PC Jewellers, which will issue 451.33 lakh shares in the price band of Rs 125-Rs 135 to raise Rs 609 crore at the upper end of the price band.

Looking at the poor performance of Tara Jewels, a competitor which listed in the previous week, the issue may not receive the desired level of support from retail investors. The issue is reasonably priced and offers discount of Rs 5 to retail investors.

The third issue is from Bharti Infratel , which plans to raise Rs 4,500 crore in a price band of Rs 210-Rs240 with a discount of Rs 10 to retail investors. The issue is extremely expensive and is unlikely to receive significant retail participation.

In conclusion, it would be a tough week ahead for the markets with key levels being 19,600 and 19,150 on the Sensex and and 5,995 and 5,830 on the Nifty.