Sensex snaps 6-week rally; Midcaps strong - Edelweiss

The key Indian stock indices retreated slightly this week from record high levels, halting a six-week rally, after the RBI left key policy rates unchanged in its fifth bi-monthly monetary policy review. But, the key highlight of the RBI policy was its dovish guidance.

The RBI acknowledged that disinflation in the past few months has been faster than anticipated, and hinted at easing early next year (even outside the policy cycle) if the trajectory of disinflation and fiscal prudence continues at the current pace.

Inflation projection for March 2015 has been scaled back, while the central bank does not see upside risks to the 6% CPI target (January 2016) anymore. Further, the Government remains committed to fiscal consolidation and it is expected to curb spending to meet the FY15 fiscal target (4.1% of GDP).

Therefore, the much-anticipated interest rate easing cycle could in all probability commence after the Union Budget in February 2015 with cuts of up to 125 bps possible over the ensuing 12 months.

Meanwhile, the FIIs poured more than US$2bn into local shares during November, taking this year's inflow to US$16bn, compared with US$19.7bn last year and US$24.5bn in 2012. The BSE Sensex has risen by 34% so far this year. Separately, the FIIs have invested US$25bn in the Indian debt year-to-date (YTD).

India remains the best performing equity market in the world YTD, up ~30% in US dollar terms. It has also outperformed the Emerging Market (EM) benchmark by ~30%. The prospects look equally bright amid growing expectations of a rate cut in the next few months, as inflation moderates faster than RBI estimates on the back of falling global commodities.

Source : Equity Bulls

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