Our markets opened gap down, as anticipated by everyone, following global cues, and as analysts are devided on the expectations from RBI on action, banking stocks started trading firm till the announcement of RBI decision to hike Repo rate by 25 basis points. This is generally expected measure as moderation of credit is being the stance of RBI in yesterday's report. The real surprise and shocker from Dr.Y.V.Reddy is increase of CRR by 50 basis points from April, 30th 2008, which invited heavy selling in banking and realty stocks instantaneously, which brought Nifty to 4160 level, where some support emerged. Nifty took held the lower band of the range advocated in the morning posting. 4400 put option gave more than 100% returns in just one day, and 4100 call position initiated today, should give good returns tomorrow. Nifty is now firmly closed below June settlement price and 5DSMA too, a head of derivatives settlement on 31.07.2008. VIX has closed at another high of 61.73, registering intra day high of 63.22, suggests continuation of higher volatility tomorrow too. 20DSMA which now stands at 4116.13 should hold tomorrow and once market players understand that the measures are proactive, good for protecting the economy from any external shocks, as still the global risks of slowing of growth, raising crude prices, imported inflation etc., also will have their impact on our economy too.
The current measures of CRR 9% and Repo rate 9% were there a decade ago, shall affect the banking sector performance in the next two quarters atleast, and only on inflation falling below double digit levels, might invite reversal of these measures by RBI. Another important parameter to be watched in the coming two quarters is 'Crude Prices' which have currently corrected about 15% from all time highs, whether it moderates further to sub 100$ levels to help regulators world over to have a sigh of relief to initiate measures for encouraging consumption and growth. Though these measures have short term negative impact on banks profitability, in medium to long term the banking stocks shall give substantial returns, as the MTM provisions made on account of raising bond yields, as per the current policy are notional losses only, which gets reversed to P&L in future, whenever situation improves. Thus, one should start building portfolio of beaten down public sector banking stocks gradually which offer good, tax free dividend income regularly, and also capital appreciation in future. Another important thing to note is 'banking sector performance ' directly reflects and contributes to growth of the economy, which cannot be allowed to underperform or suffer for long, by government or RBI.
Range for Tomorrow: Nifty might trade in the range of 4100 to 4300 tomorrow.
Strategy for Tomorrow: Sell 4100 calls and book profit and go long on 4300 puts in case of a relief rally for intraday trading.
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