Nifty could retest 11,250-11,300 on the upside; RBI unlikely to cut rates: Reliance Securities

The RBI policy meet, corporate earnings, development from Venezuela post the US sanction and outcome of trade negotiations between the US and China would be the key things to watch for in the next fortnight.

Indian equities bounced back sharply after retesting crucial support levels last week after the Interim Budget. The Nifty 50 index fell from 10,950 levels to 10,600 levels, before recovering towards 11,000 levels.

However, in value term, the market shed Rs 2 lakh crore due to huge selling pressure witnessed in the midcap and smallcap space. Consequently, Nifty midcap and smallcap indices plunged 4 to 5% each during the fortnight.

The foreign institutional investors (FIIs) were net sellers in January 2019 (offloaded Rs 5,400 crore) led by a surge in G-Sec yield and absence of strong earnings recovery. We continue to believe FII participation will remain soft till the outcome of the general election.

RBI not to cut rates:

The Interim Budget is a balanced and pro-farmer Budget. It has though tried to ease the concerns over deterioration in the fiscal deficit as the government seems confident to contain fiscal deficit at 3.4 percent of GDP in FY19 and FY20.

But, higher borrowing programme in the Budget dented investor sentiment, as the government increased gross borrowing limit to Rs 7.1 lakh crore vis-à-vis anticipation of Rs 6.5-6.7 lakh crore.

Further, the government did not announce any measures to improve its revenue side, which in absence of any meaningful improvement in tax collection may put a fiscal consolidation path at risk.

Hence, the Reserve Bank of India (RBI) policy on Thursday, 7 February 2019 would be more crucial. We do not see a rate cut, considering upside risk of inflation due to likely demand growth from the rural population after various sops offered by the government and already higher core CPI.

Corporate earning hold key:

Indian markets continue to trade at a premium to other emerging markets, therefore improvement in corporate earnings holds utmost importance to sustain premium valuations.

So far, the quarterly December 2018 corporate earnings have been below the expectations, even though improvement in asset quality of the banks is heartening.

Saying that as of now the market is more bothered about the outcome of the general election than corporate earnings, as a stable government at the centre would be crucial for the sustainable corporate earnings performance.

The RBI policy meet, corporate earnings, development from Venezuela post the US sanction and outcome of trade negotiations between the US and China would be the key things to watch for in the next fortnight.

Technically, we believe Nifty 50 index may test 11,250-11,300 levels on the upside in the current month, provided the policy meet does not give any negative surprise. Consumer, banking, housing finance, and cement companies continue to remain our favourites.

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