Equity View:Last week the equity markets bounced back with a 1.5% gain in Nifty and Sensex. The result seasoncontinued and we had fairly good set of numbers coming in from most of the private sector banks. Wehad Axis Bank, ICICI Bank and HDFC Bank announcing their quarterly results. As expected HDFC bankagain came up with a 30% Y-o-Y growth which makes it 21 quarters of consistent 30% growth in profits.Axis bank and ICICI bank also came up with a good set of numbers with a slight improvement in NetInterest Margins and a very stable asset quality. As we have been stating earlier, we continue ourpreference for private sector banks. We believe that the private sector banks will continue to have a 15%- 20% Net interest Income and profit growth for FY14.The corporate earnings so far have been led by banks and we believe that for the next few quarters alsowe would see private banks continuing to lead the overall markets. In terms of PSU banks, we continue tobe concerned about the asset quality. We believe that some of the public sector banks might still end upcoming with a negative surprise in terms of further provisioning and more and more assets becomingdelinquent, and hence we continue to avoid the public sector banking space for this quarter also.In terms of results this week, we have Hindustan Unilever (HUL) coming out with its results today. We areexpecting very soft set of numbers from HUL. The company has been struggling with volume growth forlast several quarters. We believe that the volume growth for this quarter would be around 5 – 6% whichwould end up disappointing the market broadly. A quick point about the royalty issue - with most of theMNC companies we have seen a significant increase in the royalty payment for several quarters becauseof which the net profit margins would continue to come off and as such we would advice a cautiousstance on some of these MNC names in the consumer space.We also have a big event in form of the RBI policy this week. The consensus expectation is of around 25bps cut in repo rate. The bond markets and equity markets have already discounted that. If we look atthe inflation numbers we have seen WPI number at around 6% which is a 40 month low. The coreinflation is also at around 3%, which again is a 40 month low. There has been a diversion between recentWPI and CPI data.CPI has been running at around 10% which is essentially on the back of increased food and vegetableprices. But WPI inflation has continued to cool off. Also, a point to note here is the fact that there hasbeen a significant increase in diesel prices from the middle of January and despite that WPI has continuedto cool off - which shows that there has been a considerable loss of pricing power in most of themanufacturing space. Had it not been for the diesel price hikes the WPI inflation would have cooled offeven further.
Hence we believe that RBI would take cognizance of this part and carry on with the monetary easingcycle in the policy meeting. There are a lot of estimates in the market which predict a possible 50 bps cutin repo also - which is essentially backed by the fact that in the last two annual policies which havehappened in May of 2011 and 2012, RBI has done a 50 bps kind of action which is either on the way up oron the way down. Hence a lot of market participants are expecting a 50 bps kind of a cut.Our own sense is that considering a very hawkish commentary from RBI in the month of March, wewould think that RBI would do 25 bps cut now and wait for the next policy to do further 25 bps cut. So wewould maintain our stance of a 25 bps cut. We believe that during the course of this fiscal we would see a75-100 bps point cut in interest rates. We have seen a 100 bps cut in FY13 and a similar number shouldbe expected for this year also.News:DOMESTIC MACRO: The Reserve Bank of India fixed the ceiling for the outstanding balance under the marketstabilisation scheme (MSS) at 500 billion rupees for the current fiscal year that started in April.Under the MSS, the central bank issues bonds to absorb excess rupee liquidity from the market. India will limit the fiscal deficit for 2013/14 to below 4.8 percent of gross domestic product, thefinance minister said on Wednesday.GLOBAL MACROEURO Italian centre-left politician Enrico Letta named a coalition government on Saturday, making oneof Silvio Berlusconis closest allies deputy prime minister and ending two months of damagingpolitical stalemate. Cyprus is not giving priority to a sale of gold reserves under the international bailout agreed thismonth and is still exploring all options to meet its side of the deal, Finance Minister HarrisGeorgiades said in an interview. ECB policymakers rebuffed suggestions that Europe should ease up on austerity and said thatwhile the central bank has room to cut interest rates, such a move would not necessarily help theeconomy much.US Financial data firm Markit said its "flash," or preliminary, U.S. Manufacturing PurchasingManagers Index fell to 52.0 for April, the lowest since October, from 54.6 in March.China The flash HSBC Purchasing Managers Index for April fell to 50.5 in April from 51.6 in March butwas still stronger than Februarys reading of 50.4. Chinas central bank has been talking tough on currency reform while it has also intensifiedmarket intervention, highlighting the fine line it must walk in trying to liberalise the yuan.
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