Rate-cut is key to markets

Banking stocks are likely to remain in forefront

After facing alternate bouts of selling and buying, the Indian stock markets have closed almost unchanged last week. With a small gain of just three points, the BSE Sensex closed at 28,115 as against its previous week's close of 28,112.

Thus the markets not only shrugged off the usual nervousness faced when F&O contracts in derivative trades come to an end every month-end but also survived a likely set-back that might have been suffered from poor or lower-than-expected profit numbers as churned out by companies including a few leading ones, and, instead, ruled firm in the last three trading days on a hope of an interest rate cut in the ensuing monetary policy review meeting of the RBI scheduled for Tuesday of the current week.

The dry spell has come to an end in many parts of the country and resumption of monsoon rains has resulted in softening of commodity prices including food articles. The accord signed a couple of weeks ago between six major global powers and Iran has also prompted the state owned oil marketing companies to slash selling prices of cooking gas, diesel and petrol twice in a short span which would keep the inflation under check.

The government has also announced a plan to infuse funds worth over Rs 20,000 crore into the public sector banks this fiscal and also announced that a total of Rs 70,000 crore would be infused into banks in the next four years. However, the week under review commenced on a highly negative note as the markets on Monday crashed by 551 points and continued to fall on the following day also.

With a further fall of 102 points on Tuesday, the Sensex was down by over 600 points in the first two days only. The fall in the first two trading sessions was, however, more based on global news and also fresh concerns over foreign funds' investments through P-notes. The finance minister, however, cleared doubts by saying that the government will not take any steps that may hurt the investment climate.

On Thursday, the last day of derivative contracts for July, the markets rose by 142 points and thereby shrugged off the usual negativity that generally haunts the bull operators at the account-end day. Friday being the first day of the new contracts for August, the Sensex staged a jump of 409 points. Thus at the end of the week, the markets were up, though by just two to three points.

As explained, the government has set a stage for an interest rate-cut by RBI and also prompted the EPFO to start making investment into shares from August 6th onwards. The Federal Reserve did not hike interest rate in its two-day-long review meeting last week which was a breather for the global stock markets including India but with the US economy improving faster than expected, has certainly cleared way for a rate hike in September this year.

However, even this happens, the Indian markets are not going to be affected much as the same has already been factored in prices. The crude oil prices are steadily going down globally and are expected to fall further down in the days to come. Commodity prices are also softening. The growth rate in industrial production in the month of June has fallen. The monsoon has once again become active.

All these are the conditions that fit well for the RBI to cut interest rate on Tuesday and make the markets go up in the days to come. The banking stocks are most likely to remain in forefront if the markets go up on a possible rate-cut and therefore, they should be given preference over others for buying.