A 50 basis points Fed rate cut may boost Indian bourses

A 50 basis points Fed rate cutmayboostIndianbourses

It was a week of “changes" on the bourses. The biggest one last week was the investment pattern of foreign funds. Foreign funds were the key drivers of the bull run so far this year. However, their net selling in November put a question mark on the sustainability of the trend. But things changed dramatically last week, with foreign funds turning net buyers to the tune of $872.2 million (Rs3,436.46 crore) so far. This is a very positive factor and will be reflected in the market.

However, this week, the meeting of the US Federal Reserve, scheduled for Tuesday, will be the key trigger as a lot of hope is being tied to its’ decision to cut interest rates. Analysts are speculating over the quantum of the cut and opinion is fairly divided on it. A 25 basis points cut has also been factored in, which leaves the option of a 50 basis points cut to ignite the next leg of a bull run.

Unlike some other markets, India will not be very disappointed if the interest rate is cut by just 25 basis points. Though there may be a blip in sync with the global trend, Indian markets will bounce back and move up. This is because interest rates in India are much high and are not likely to be lowered soon. This makes it a very attractive destination for foreign money. Moreover, the rupee is likely to strengthen further, which will trigger more foreign fund inflows. Of course, a 50 basis points cut can be a big trigger for Indian bourses and may actually kick-start the next leg of the bull run, which can take the Sensex up to 22,000 points. But if the worst happens—the Fed does not touch interest rates—it would mean the beginning of a decent correction, which may pull the Sensex down by up to 6-8%.

The Fed’s choices

Unlike previous occasions, the situation this time is quite tricky for the Fed. The latest data related to non-farm payroll showed modest growth in November, easing concerns of a recession and indicating resiliency in the economy. This dilutes the case for an aggressive rate cut.

This week, inflation data will also be watched carefully to understand the intensity of recessionary fears. The labour department will release its producer price index for November on Thursday, and the consumer price index is due on Friday. Both these numbers are expected to show an increase even though they do not include volatile food and energy prices. If these numbers are potentially inflationary, the Fed will find it difficult to opt for a big cut. But a big cut is just what the turmoil in the credit market requires. More than the cut, though, the market will also be watching the Fed’s guidelines and its tone. If the tone remains soft on the issue of a further rates cut, markets across the globe, including India, will move up.

Local moves

On the domestic front, there are no big events scheduled and hence, no major triggers. However, purely technically, the markets are now headed North. And moving up, the first resistance is likely to come up at 20,338 points, which is the highest level the Sensex has touched so far. If it crosses this level with good volumes, then there would be more gains and the Sensex could touch 20,538 points, where there will be strong resistance. However, if the Sensex crosses this level, too, the next resistance will come up at 20,869 points. On its way down, the Sensex would test its first support at 19,710 points, which is an important support level, and breaching this level would be considered negative as the Sensex could then test 19,281 points, another key support level; a close below this level would be quite bearish, which might take the Sensex to the levels of 18,824 points.

Technically, this week HDFC Bank Ltd, Bharat Earth Movers Ltd (BEML) and ABB Ltd look good on our charts. HDFC Bank at its last close of Rs1,721.25 has the potential to touch Rs1,778 with a stop-loss of Rs1,672. BEML from its last close of Rs1,765 may touch Rs1,842 with a stop-loss Rs1,702. And ABB, which is in consolidation phase, has a target of Rs1,662 and a stop-loss of Rs1,552, while its current market price is Rs1,606.

From our last week’s recommendations, Titan Industries Ltd, recommended at Rs1,529, touched a high of Rs1,630, which was well above its target of Rs1,586. Larsen & Toubro Ltd, recommended at Rs4,129, touched its target of Rs4,283 easily and hit a high of Rs4,407 during the week. Reliance Capital Ltd, recommended at Rs2,357 touched a high of Rs2,540, well above its target of Rs2,430.

Vipul Verma is a Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at ticker@livemint.com