Markets to see correction on disappointing RBI review: BofA

Bank of America Merrill Lynch (BofA-ML) has said the Indian stock market is likely to witness a 6-8 per cent correction from current levels after the Reserve Bank of India's (RBI) monetary policy review disappointed expectations.

Stocks, which rallied sharply since Raghuram Rajan took over as the RBI Governor on September 4, have fallen sharply since the central bank's policy review on September 20, when the central bank hiked repo rate by 25 basis points against expectations.

The Sensex had surged 685 points to close at an almost three-year high of 20,646.64 on the eve of Rajan's first review as RBI Governor.

"The markets will be range-bound in the 18,500-20,500 range as weak economic and earnings growth caps the upside while hopes of rate cuts and policy measures protect the downside," the global financial services major said in the report dated September 23.

The 30-share BSE Sensex, which lost 745.68 points in the previous two sessions, fell 118 points in the morning, before closing the day just 19.25 points, or 0.10 per cent, higher at at 19,920.21.

The index had gained 9 per cent between Rajan's takeover and the policy review.

The report noted that "as markets are already close to our upper limit of the 'range' we believe the risk reward is not favourable."

According to BofA-ML, one key risk for the markets is that foreign institutional investor (FII) holdings, at about 21 per cent, are close to all-time highs. "India thus remains vulnerable to any global emerging market sell-off in the near term," BofA-ML said.

Moreover, sentiment towards the Indian markets has turned negative and this could likely impact FII flows if things worsen in the coming months. Other factors that may affect the market trend include earnings recovery, the RBI's main focus on inflation, forthcoming elections, negative sentiment about India and high valuations.

On earnings, the report said given the delay in macro recovery and demand destruction, BofA-ML does not expect a material pick-up in corporate earnings.