Reforms, RBI rate cut could help Nifty break 5,800

There was consolidation within a narrow Nifty band of 5,640 and 5,720 last week, with a bit of volatility and a flat closing at 5,684.

Heavyweight results and political heat dominated the mood on the street. The government’s reform agenda continued with a Group of Ministers (GoM) panel clearing a watered down land acquisition bill, a development which was cheered by industry leaders only to be later vetoed by Congress chief Sonia Gandhi. The much awaited expose by activist-turned-politician Arvind Kejriwal failed to create ripples.

Oil prices saw a correction as euro zone uncertainty on the Spain bailout continued to affect sentiment. The rupee weakened by 1.73 percent during the week to close at 53.84. FIIs have also reduced purchases after relentless buying in the past few months. WPI inflation edged up to 7.81 percent in September compared to 7.55 percent the previous month due to the hike in diesel prices. Despite high inflation figures, the Reserve Bank of India (RBI) is expected to cut repo rates by 25-50 bps on Oct. 30 to support growth following government policy action in the last few weeks.

Euro zone banks will be moving towards a single supervisory mechanism with an agreement to have the legal framework in place by January 2013. This could bring some stability unless there are any shocks from Greece or Spain.

Reliance Industries results were in line with market expectations but the stock failed to shore up as worries still exist on gas pricing after 2014. The fracas between the oil ministry and Reliance continues as the latter has refused to allow an audit by the Comptroller and Auditor General of India (CAG) to check its expenditure on developing offshore blocks. I believe one of them has to blink sooner than later as neither can afford a logjam for long.

Among other results, ACC and Ambuja Cement were in line with expectations. Street talk of 2 percent royalty which could be imposed by Holcim may continue to be a pressure point for these stocks, which had a dream run in the last six months and touched a 10-year high. HCL Tech continues to beat expectations whereas TCS surprised the markets with a huge 7 percent growth, confirming its leadership position in the sector. Infosys has slipped to third position behind HCL Tech.

ITC results continue to surprise markets with a better agro-sector performance and lower FMCG losses. I have been bullish on ITC for the last two years but the announcement of an investment of $2 billion in the hospitality sector has made me cautious on further investment.

Hospitality sector returns have been dismal.

The telecom sector continued to be in focus due to speculation that the government may accept the proposal for re-farming of the spectrum, thus putting old players at a disadvantage. The decision has been kept in abeyance by the EGoM. In case it is accepted, it would again send a signal of unstable policies in addition to a steep increase in tariffs.

Kingfisher Airlines’ licence was suspended on Saturday which could be the proverbial “final nail”. The airline has been steadily losing passengers due to its erratic schedule and the uncertainty dogging it after financial problems. The only ray of hope –  getting a white knight to revive the airline after liberalised FDI in aviation — seems dim. The trickle-down effect will be felt on banking stocks which have exposure to the airline.

Next week, though a truncated one due to the festival season, will see quarterly results from Larsen & Toubro, Cairn India, auto majors Mahindra & Mahindra and Hero MotoCorp, banks such as ICICI Bank, Punjab National Bank and Bank of Baroda, and FMCG giant Hindustan Unilever.

The derivatives settlement in the coming week could increase volatility. This week will also confirm whether we are headed higher for the next settlement as any further weakness from current levels after two weeks of consolidation could dampen the mood.

I expect another wave of policy action before the winter session of parliament and a positive RBI policy, which could bring back bullish sentiments in the markets and help the Nifty break the 5,800 barrier.