Stock market feels RBI will keep rates unchanged

Don't get carried away by last week's rise in the Indian market. Some of it can be attributed to net asset value (NAV) propping ahead of the year-end. Lack of supplies also supported the rise in the Sensex as there was no major selling by domestic institutions, especially insurance companies and buying by foreign institutional investors (FIIs). This saw the BSE Sensex on March 28 scaling a new all-time high of 22,363.97, before closing at a 22,339.97, gaining 2.68 per cent during the week.

Liquidity has been the primary reason for the upward movement of the BSE Sensex. This was due to the confidence and the strength in the market on the hope that the National Democratic Alliance (NDA) will come to power. The market which was earlier expecting a fractured mandate or a hung Parliament now believes a stable government will be formed at the Centre.

The mood of the market may have turned positive, but the fear of losing money still remains fresh in the minds of the public thus keeping many waiting at the sidelines. Though one should keep room for safety and be cautious, one should be invested in the Indian equity market.

In fact Jayant Manglik, President-Retail Distribution at Religare Securities has advised fresh clients who wish to enter to consider PSU banks, select mid-cap and infrastructure stocks, while asking them to keep away from software and pharmaceutical stocks. If that is difficult it would be safe for investors to stick to large blue-chip stocks or simply remain passive investors by buying the index.

The Indian market will be vulnerable to global movements, but it is better placed than many others as there aren't many countries and markets in the world which gives investors a better place to invest. The interest rate differential between India and the West (especially the US) is still favourable and the view that the US will not increase rates in 2014 augurs well for India and its market. Improving economic indicators and strengthening of the Indian rupee will all be favourable for inflows to be positive.

Meanwhile on Tuesday, April 1, the Reserve Bank of India (RBI) will announce its first bi-monthly monetary policy. From April 2014, RBI will hold six reviews in each financial year to take a call on the monetary policy. The policy review will be undertaken in a two-monthly cycle.

Though economic indicators are good and inflation has been coming down, the majority of market participants see RBI holding the rates. In its previous monetary policy review on January 28, the RBI had raised repo rates by 25 basis points (bps) to 8 per cent.

According to RBS's client survey that surveyed 100 plus clients including corporate clients, banks, insurance companies and mutual fund on pre-RBI credit policy, 14 per cent expected a 25 bps cut, while 7 per cent expected a 25 bps hike in Repo and Reverse Repo rates. The majority did not see cut in key rates until December 2014.

On Tuesday, we will see if RBI retains or cuts or hike rates, but the policy announcement will help is dictating the future course on rates as well as the near movement in the market.