See Nifty in 5900-6100 range; CRR, repo hike ruled out now

Thursday was not a good expiry for the Indian equity market and the Nifty crumbled to 5900. Though the currency and bond market seem to have improved, we are in a volatile market says CNBC-TV18's Udayan Mukherjee. It will be seen today how the August series starts and important earnings will be eyed today.

Below is the edited transcript of Udayan's analysis of the market.

On Nifty

Yesterday wasn’t a good close at all. I don’t know what the August series will start like because we were almost at 6,100 and the market suddenly came off to 5,900. Some of the macro stability factors have stabilised a little bit. The rupee seems to be hovering around 59/USD and even the bond yields have cooled off suggesting that the market now believes that some of the Reserve Bank of India (RBI) measures have worked in stabilising or atleast filtering some of the volatility in the rupee.

Hence, on July 30, we will not see the RBI doing something dramatic like a repo rate or a cash reserve ratio (CRR) hike and that is the reason the bond yield also cooled off yesterday. So, these things are comforting factors for the market, which might lead to this 5,900-6,100 range atleast not breaking in the near-term.

We have had a couple of bad days. The market has given up quite a bit of ground, more than 3 percent over the last two sessions and now it is possible that it stabilises a little bit and soaks in more data points, sees how the macro indicators are moving and the big numbers, which follow over the next few days.

On RBI Policy and Fed meet

Next week will be pretty important because of RBI's policy on the one hand on July 30 and Fed meet on July 31. Both are important for the global as well as the local markets

You never can wish away surprises from the RBI. However, the way the wind is blowing even the bond market, the way it moved yesterday, it seems to suggest that the market is drawing the right inferences that the RBI would only do dire things if the rupee were to be at more than 60/USD on the day of policy or leading up to that.

The probability of that has gone down, nothing can be certain in the markets or with the central banks but the probability has reduced. Therefore, the market is probably breathing just a little bit easier over the last day or so and if going into that policy, the rupee keeps its head around 59/USD, better still below 59/USD as it traded for a bit yesterday then the market will be more or less sure that more tightening is not going to follow and therefore the bonds will get a bit of a respite, maybe the banks do not fall or continue their fall at the same pace and all of these just about manage to hold the Nifty out.

I am not suggesting that we go to 6,200 immediately, but at least holding of the range for the next few days is possible after the damage that has happened over the last couple of days which has skimmed off some of the froth in the market in any case.

Rupee impact on sectors and Bank Nifty

I am suggesting that may be the market will stabilize for a bit even if they have to fall more later because some of these things appear a bit overdone. IT is becoming a crowded trade right now particularly in a context where the rupee stabilizes, if the rupee is around a 58 handle.

And I think all the math that was happening with the rupee at 61-62 for IT companies and their profits those implications just begin to reduce a little bit and for a sector which has done so well, you might see a little bit of profit taking happening there. The banking index has fallen quite a bit and I think some stocks have fallen probably in the near term more than is warranted just immediately and therefore there could be a pullback there as well.

However, the medium term for the bank still remains challenging because if you have been reading this CRISIL report which has come out on what is going to happen with Indian companies because of the RBI tightening and the general kind of economic performance we are dealing with, to talk about more than 3000-4000 companies not being able to service their debt as CRISIL is pointing out.

I mean where will banks outperform from, you talk to bankers they are saying you are okay with asset quality and CRISIL is saying that 3000-4000 companies will not be able to service their debt. So the two don't sit together and the market is probably leaning more towards CRISIL side. So near term may be the fall is overdone and you get a bit of a pullback particularly if bond yields soften further to 8 percent kind of levels which is not impossible in the near term.

But I think in the medium term these kind of challenges that are cropping up and will continue to render the banks, probably an underperforming asset class for the next few months.

Index performance

Today’s closing is very important because over the last two days we have lost nearly 150-200 points on the Nifty. If today we close in the red by however much, the conviction and today is the first day of a new series so for people who want to wish away the last couple of days as expiry related pressure, today is a cleaner test of the market. So if today is a closing in the red, I think the conviction in the near term downtrend will grow for a lot of traders.

And people may even believe that the market topped out once again just below 6100 and has resumed its downtrend once again. Unless the Nifty can confuse the bears by moving up today and in significant fashion, then it still has the possibility of staying afloat in this 5900-6100 kind of zone once again. However, today if we close in the red then people will start giving up on the Nifty in the near term and we will hear a lot more people talking about a revisit of that 5700 mark which is seen as a strong near term support for the index for the moment.

I think it is disappointing that some of the stronger clusters like FMCG have started coming off a little bit of late which might make the market a bit nervous and vulnerable going into the August series. But as I said earlier it is a possibility that some of these factors like the bond yield easing, the rupee staying in a bit of a range, most importantly the dollar unable to strike out a rally globally because it almost looked like that day before yesterday but yesterday was a weak day for the dollar and that is very crucial for emerging market performance now.

If that continues to keep its head down, it is possible that the Nifty stays in a trading range. So fingers crossed let us see what today’s weekly closing is like and then one will have a better picture for what the near term trading trend is like but the chances of a reversal certainly have grown over the last couple of days.