Stocks take repo hike in their stride

Money


Stocks surrendered most of the day’s gains to close marginally higher after Friday’s repo rate hike, signalling markets could consolidate in the near term after a sharp rally from the lows of mid-June.

A positive for the market, however, is that the front-loading of rate hikes may be behind, and aggressive rate hikes may not happen now.

Market reaction

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Market reaction

“We believe commodity prices have cooled off, including crude oil, and inflation may be peaking out. We expect RBI may not be very aggressive in its subsequent policy meets and be more data-driven based on inflation numbers,» said Motilal Oswal, managing director and CEO of Motilal Oswal Financial Services.

The Nifty index closed nearly unchanged at 17,397.5, while the Bank Nifty closed 0.4% higher at 37,920.6. The Nifty closed 77 points off the day’s high while the Bank Nifty closed 230 points below the day’s high.

The 10-year bond yield rose 13 bps to 7.29%, as dealers unwound short positions after the rate hike came at the upper end of expectations, while the rupee strengthened.

“Since growth is becoming broad-based and private capex is showing signs of revival, RBI has front-loaded repo rate hikes to control inflation,» said Nilesh Shah, managing director of Kotak Asset Management Co. “Given the significant rally since June, we advise caution to investors, suggesting buying in a phased manner on dips.»

Nirmal Jain, chairman of IIFL Group, expects the front-loading to prevent a potential sharp fall in the rupee, at least for now, and this could “augur favourably for FPI inflows.»

The rupee gained 23 paise to close at 79.24 to a dollar, which analysts attributed to a fall in oil prices. Brent crude slipped below the $100 a barrel mark, significantly lower than closing highs of more than $121 a barrel seen in July.

“We expect the repo rate to head towards 6% before it peaks, and this should allow real rates to support the rupee via carry trade,» said Anindya Banerjee, vice-president, currency derivatives and interest rate derivatives at Kotak Securities Ltd.

However, global uncertainties will prevent any significant appreciation in the rupee, which may remain range-bound over the coming days in the near term, feel experts.

Akhil Mittal, senior fund manager, fixed income, Tata Mutual Fund, said the 50 bps hike is currency-supportive. He said he expects the rupee to remain in the 79-80 per dollar range and take broader direction cues from the movement in the Dollar index.

Bonds also gained on Friday.

“We expect interest rates to remain range bound (10-year benchmark G-Sec in the range of 7.15%-7.40%) for the near term, and as systemic liquidity remains volatile, we might continue to see a flattening of the yield curve,» said Tata Mutual Fund’s Mittal.

After nine straight months of selling shares, foreign investors turned buyers in July and have remained net buyers of equities in August, too. Provisional data suggest that FPIs were net buyers of 1,605.81 crore worth of equities on Friday.

Though the Nifty gained 1.39% over the week, it has closed in a 15-point band in the last three sessions with intra-day recoveries and sell-offs. This bull-bear fight may soon end, and markets may take a direction for the short term, said Deepak Jasani, head of retail research at HDFC Securities.

From their 17 June lows, the Nifty is up 14.6%, while the Bank Nifty is up 17.4%.

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