Below 4000, More Downside Possible

Surprisingly, the markets did not open with a negative bias today and in fact started gaining ground in the beginning of the day. But the good times didn’t last long, in fact, not even a full hour and by 11AM, the markets began their southward journey, and finally found a little bit of support near 4020 at 3PM which held till the closing bell. The break of the support at 4093 (most recent pivot low) was a big negative for the Nifty. The Nifty eventually closed at 4040.55, which happens to be the lowest close since 20th April 2007.

This also means that our Elliott Wave counts of 1,2,3,4,5 of corrective wave C, as mentioned in one of the previous posts has gone wrong. It also means that the fifth wave has not ended as yet. This means that the fifth wave is also an extended wave. We don’t know how long it will be. What we know is that it cannot be longer than the third wave. The third wave started at 5167.40 on May 16, 2008 and ended at 4369.80 (assuming that to be the end of wave 3) on June 10, 2008, thus measuring 797.60 points. The fifth wave started on June 18, 2008 at 4679.75. This means that the wave five cannot go below 3882.15 in any case. If it does then it means that our wave counting is wrong again and that we may still be in wave 3 of major corrective wave C.

For tomorrow we have support between 3970 and 4000, as was seen in the chart shown yesterday. According to the Elliott Wave Counts (assuming them to be correct), we do not expect the final low for the Nifty below 3882.15. So, we may be looking at support between 3882 and 4000. Shown above is the daily chart of Nifty with Elliott Wave Counts and with the Bollinger Bands. The close of the Nifty today was below the lower band, and as mentioned in an earlier post, it means that if the close does not come back within the band tomorrow then we may be looking at more downside. It effectively means that if it breaks 4000 tomorrow then we may be looking at a target near 3882.

The political situation also worsened (or improved??) today. The Prime Minister has decided to go and attend the G8 summit. The Left has taken it as a signal that the Government has decided to go ahead with the nuclear deal and reiterated, once again, that it would withdraw support if it did so. To make matters worse, the Prime Minister said that “there has been nothing new with the Left’s stand”. The political analysts view his confidence as a confirmation that the Government is confident of getting the support of the Samajwadi Party (SP) in case the Left withdraws support. With the UPA tally at 225 and adding 39 as the SP support the UPA still falls 8 short of the magic number of 272 to get a majority. However, getting the support of 8 more may not be too difficult a problem for the government. In case it does get the support, it would mean that the nuclear deal would go through and the government also will not fall. With the Left out of the way, the Government actually may be able to take some positive decisions (not saying that it has too much of time to do that since elections are due in May next year). That would be an ideal situation for the markets to begin a new bull market.

But inflation would still remain a concern and the market may probably be looking at a stabilization in the inflation rates before starting to go up again. With the world commodity prices still increasing and crude on the rise again, and the effect of the petrol price hike last month trickling down to other industries, the inflation figures are likely to become worse at least for another month or two, before stabilizing.

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Happy Investing!!!

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Inflation and Crude Oil Technical Analysis

The topic of my discussion today is crude oil. But because of the increasing oil prices we saw a hike in the prices of petrol. That will increase the inflation, so let me talk about inflation. With increasing inflation, the markets will come down, so let’s change the discussion to the markets. But this oil price increase may be because of the weakening dollar. Shall we talk about the dollar then? There are so many things to talk about, why limit ourselves to one topic. I’ll just write type whatever comes to mind.

Let us take a very simple example. Let us assume that milk and cows are not easily available commodity/animal. Let us assume that you have 5 cows with you (lucky you) and that you get about 50 litres of milk a day. Since milk is not easily available you don’t want to sell it all and would like to keep some for your future use, so you freeze it. And since your neighbours are buying from you, you sell about 28-30 litres in a day, consume 2 and freeze the rest. Now, your cows are getting old and their milk giving capacity is going down. You know that in a few months time you will be left with no milk. Your neighbours are requesting you to start selling 40-45 litres a day. Obviously, you won’t do it because when the cows stop giving milk, you could charge a fortune for a litre of milk.

Now let us say that the cows will give milk only for 6 months more, which is 180 days. At your current rate of 20 litres a day, when the cows stop giving milk you would have 3600 litres of frozen milk with you. The neighbours have been paying you with a kilo of rice for each litre of milk. But rice is easily available and its value is going down. And because of the value of rice going down, you have started asking for 1.2 kg of rice for every litre of milk. And because you are selling less your neighbours are even willing to pay 1.5 kg of rice for a litre of milk. You know that your 3600 litres of milk which was worth 3600 kg of rice, will now get you 5400 kg of rice. So, in effect you are richer by 1800 kg of rice without doing a thing. Would you sell more milk or just keep building up your wealth which is now increasing without even selling?

This is exactly what is happening in the world today. Just substitute crude oil for milk, the oil rigs for the cows, the Arabian countries owning the oil rigs for yourself, the rest of the world for the neighbours and the US dollar for rice. It is all so simple. Why would they sell more oil when their net worth is increasing every day because of the depreciating dollar? Why would they sell more when they know that 20-30 years down the line when the production is zero, the crude will be worth much more? Why would they sell more when they could get a fortune for a barrel of oil 30 years down the line?

Inflation jumped to 8.24% for the week ended May 24, 2008. On Wednesday, the government hiked the price of petrol by Rs.5/- per litre, diesel by Rs.3/- per litre and LPG by Rs.50/- per cylinder. The government says this hike could increase the inflation by 50 or 60 basis points. But inflation is not only affected by fuel price hike. This fuel price hike will have a cascading impact on all sectors from industries to agriculture and even services. The worst hit, as is easy to understand, will be the transportation sector. It will also mean increased house rents because the cost of construction material will be pushed up by the cost of transportation. And since almost everything needs to be transported before and after production, this hike would affect everything. In time, the food will also becoming dearer, and now with the LPG hike even cooking the food is going to become costlier.

The Economic Times says that historically a Rs.2/- per litre hike in petrol and Rs.1/- per litre hike in oil pushes up the wholesale price index by more than a point in the subsequent two weeks. The LPG price had not been increased since 2004 and this time with a Rs.50/- per cylinder hike in LPG and Rs.5/- and Rs.3/- hike in petrol and diesel respectively, the wholesale price index could move up about 4 points (though the Economic Times says only a point and a half) in the week ended 7th June, the figures for which will be released on 20th June, 2008. This would push the wholesale price index to about 234.5 to 235. A figure of 235 would translate into an inflation of over 10.48% since last year in June the Wholesale Price Index was 211.8.

Coming back to crude, the crude price jumped by more than $10 a barrel on Friday to a record high of $138.54. Did the government do something wrong in increasing the petrol, diesel and LPG prices? Absolutely not, but it came too late. This was a decision which should have been taken months ago. With the reformist finance minister, Dr. Manmohan Singh heading the government, we didn’t expect such a good economic decision to come so late in the day. But maybe the government was just waiting for the Karnataka assembly elections to get over. But the decision took more than 10 days after the elections to be announced. Every single day was adding up several crores of rupees of losses for the oil companies. But in the end such a drastic hike was a bold decision by the government. But despite that, Petrol sold in India is still about Rs.10/- per litre cheaper than what price it commands in the rest of the world. But where is it headed? $150 a barrel is not too far away and there even have been predictions of $200 by the end of the year. Let us do some technical analysis.

Seen above is the daily chart of crude oil near month futures listed on Multi Commodity Exchange (MCX) in Rupees. In this chart we are not taking the help of any line studies or indicators. The only thing on the basis of which we are trying to predict is the Elliott Wave Theory. Applying the Elliott Wave counts to the above chart, we can see that we are currently in the 5th wave. All waves have been marked as 1,2,3 and 4. 0 is where we have started the wave count from. You can also notice that within wave 3 also there are 5 waves which have been numbered in brown colour to avoid any confusion. Wave 1 was Rs.1076/- long while the length of wave 3 was Rs.1838/-, which clearly shows that wave 3 was the extended wave. This means that wave 5 should be, more or less, as long as Rs.1076/-. From the end of wave 4, this gives us a target of Rs.6288/- per barrel for crude when wave 5 ends. A target of Rs.6300/- would translate into a price of $148/50- per barrel in dollars. There the crude should, rather, could make a short term high, at least.

More tomorrow. Happy Investing!!!

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Markets Tumble as Crude Advances

The US markets (Dow Jones) was down over 200 points last night (Thursday) on concerns of crude oil reaching a record high of $123 a barrel. Even the Asian markets were weak this morning and we were bound to go down with weak global cues. It was because of this reason that the Sensex opened more than 200 points down while the Nifty opened about 50 points in the red and then stayed down all through within a range of only 30 points throughout the day.

We have the 30 minutes chart of the Nifty with us today and there are some observations that we can make from it. The support trendline on this chart is lower than it was on the 60 minutes chart. Here we have support from the trendline at around 5070, which has not been broken as yet. The highs made between 5065 and 5070 on 22nd, 24th and 25th of April also provide support at these levels, which has been signified by another trendline. And then we have another trendline, and this time a downtrending one, which signifies that prices should go up if they cross this trendline at 5100. This last trendline, if seen in conjunction with the RSI signifies a positive divergence, which means that while the prices have been coming down during this period, RSI has remained more or less stable. There is another trendline, which connects the high made on 7th April and the lows made on 15th and 16th April, which also provides support at 5070 but that has not been shown here to avoid two things – firstly, and more importantly, confusion, and secondly, excessive analysis, because excessive analysis leads to paralysis, also known as analysis paralysis, says Chris Garrett.

The price of crude oil has more than doubled in the last year and a half, has become six times in the last six years and has become eight times in the last nine years. Some of the causes of rising crude oil prices have been discussed in one of my previous posts titled “Renewable Energy”. Incidentally, this article has also been published on Reuters.

This article on Bloomberg writes that countries like China, India, Russia and the middle east may be responsible for the rising crude oil prices. A few days back President Bush too attributed the rising food cost to China and India. While that may have been a little far-fetched to swallow, Bloomberg (rather, the International Energy Agency in Paris) may well be right about its claim, though if we compare the per capita consumption, US is still consuming 10 times the energy than India does.

Dance with shadows says that The burden of the rising crude price has a huge bearing on the profitability of many industrial units in India. Commodities such as aviation turbine fuel (ATF), naphtha and bitumen have witnessed a huge price increase during 2007-2008. These products are selling at market-determined prices. Their prices are up by 27-39% year-on-year. It is expected that the rising price would have a huge impact on air travel, power and polymers sectors directly. We need to prepare to pay more for most manufactured products in the future.

This clearly shows that these increasing crude prices will have an effect on the inflation in our country and CRR hikes and interest rate hikes may not be the only solution. Maybe that is why the markets went down today, fearing the worst. It could very well be the same tomorrow, depends on global cues. Plus, the inflation data is also due out tomorrow. Let us cross our fingers and hope for the best. Technical Analysis does help buy but sentiment holds the key.

Happy Investing!!!

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Above 5000, Expect a Target of 5500

Before I start with anything else, I must thank all my readers for their continued support. I have now posted 100 posts on this blogspot. It is all because of your continued support and readership that this blog is still a success. I hope that my source of inspiration – my readers – continue to extend their support to me.

Last week was a good week. The markets were closed on Monday on account of Ram Navmi and they were closed again on Friday because of Mahavir Jayanti. So, we were working only on Tuesday, Wednesday and Thursday. I, somehow, liked this three day week. I hope there are many more to come. And now on Sunday evening, Monday blues are already catching up with me.

In terms of market movement too, it turned out to be a good week. The Nifty ended all three days in the green, thus ending the week with a net gain of 180.60 points. Maybe the market too likes three day weeks. We just have to wait and see how Monday goes. If it is a down day then we’ll know that ‘Monday Blues’ don’t affect only the humans.

On account of news, it was a mixed week. The inflation figures that were declared on Thursday this week instead of Friday showed that there was a slight drop. It dropped to 7.14% as compared to the 7.41% the week before that. The RBI Governor decided to increase the CRR (Cash Reserve Ratio) by 50 basis points in two steps to 8%, which is expected to suck out approximately Rs.18500 crores of liquidity. It was surprising that the decision was taken in spite of the marginal drop in inflation but, more than that, surprising was that the decision could not wait upto the credit policy announcement on 29th April. This may suggest some harsher decisions to be announced on April 29th.

While a CRR hike of 50 basis points was expected, no change in the repo rates is expected at the moment. Even though the hike was expected to some extent, the market may still react negatively. There is a view in the market that even though a repo rate hike is not expected at the moment, the CRR hike itself will have an automatic upward pressure on the interest rates. There is also a view that a CRR hike wasn’t necessary and is not likely to contain inflation to a great extent. A major part of the current increase in inflation can be attributed to the increase in the prices of metals, the prices of which are not governed by or within India and the only way to address that issue is to have restrictions in place so that the supply is increased. That explains the reason why steel exports were banned last week.

Let’s get to the technical analysis part of the newsletter. Seen above is the daily chart of Nifty. We can clearly see that at this level, the Nifty is not only finding resistance at the top of its range but also from the downtrending line which has been in place for the last 3 months. This is likely to be a strong resistance. The CRR hike has come about at an inopportune time. This will add to the pressure that the Nifty is facing at 5000 levels. Maybe the time to cross these levels has not yet come. Maybe we’ll have to wait some more.

However, all is not lost yet. Even at the top of the range the Relative Strength Index (RSI) is nowhere close to the overbought levels (above 70), which suggests that there is still some scope left for the prices to go up. Secondly, there is a positive divergence between the price and the RSI visible on the charts. Positive divergence means that while the price is making lower highs, the RSI is continuing to make higher highs. And another positive at this time seems that the RSI has broken through its upward sloping trendline. And not to forget the influence of the global markets which all looked happy and strong on Friday (except China). Maybe, after all, this may be the time to go up. Wait and watch. Above 5000, the Nifty is looking at a target of 5500.

Axis Bank has broken through the downward sloping trendline with a big spurt in volumes. One may consider buying near 800 with a stop loss of 740 for a target between 1000 and 1020.

HDFC Bank has made a pattern of fan lines. In fan lines, in the beginning, a stock finds resistance near a particular trendline. Once that trendline is crossed, it does not change its trend immediately but now starts finding resistance near another downtrending trendline. When this trendline is crossed, it yet again finds another trendline. These are called fan lines. In technical analysis, it is usually said that once a stock crosses the third fan line, it should get a good and a quick move. Notice the spurt in volumes on breakout of the third trendline, which was absent during the previous two breakouts. One may consider buying between 1360 and 1380 with a stop loss of 1270 for a target near 1650.

ITC has a history of finding resistance between 210 and 215. Notice the presence of the two doji candles (having the open and the close at almost the same levels) which signify that this maybe a top to remain for the next few days at least. Also, notice the absence of strength in the RSI because of which it is not able to decisively go through 60. This may be a good time to exit ITC.

Reliance Petro had been stuck inside a narrow range for over 3 months now and has now come out of that range on the upside. Because of the negative news of the CRR hike, a dip to 180 is possible. It might make sense to pick up this stock near 180 with a stop loss of 165 and a target of somewhere between 215 and 220.

Wipro, on its daily charts, seems to have made a bullish head and shoulders pattern. A move above 465 should confirm this pattern. While the stop loss is a little deep at 400, it could be bought above 465 for a target close to 570.

Happy investing!!!

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Fundamentally Strong Reasons to Buy

Today’s movement did not help the markets much except giving us a day in the green. The markets are still stuck within a range and there are concerns amongst some circles that the markets may break down below the range rather than breaking out upwards. All that is very true. The markets could break down either way. There were some positive signals in the short term charts but those too seem to have fizzled out.

Stocks, or the markets as a whole, cannot be down forever. There has to be some value buying at some level. Agreed, that the GDP growth rate is slowing but it’s still a very good rate of growth. Agreed, that the inflation is rising and that the growth may become still slower but we will be able to control the inflation and the companies will be able to show good earnings despite inflationary pressures. And then the value buying will emerge. The smart money always buys first. We have to ensure that we become smarter and buy with them, if not before them.

Presented below is an analysis of the value and the fundamentals in the Indian markets, which I had received from someone in an email. The source is unknown so cannot give credit where it is due, for the same. The last leg of the recent bull market was driven more because of excess liquidity, leveraging and rumours than because of fundamental reasons. The same situation had been last seen in Feb-Mar 2000 when the markets rose because of the dotcom bubble. After Mar 2000 we saw a huge bear market which lasted almost three years. Is it going to be the same this time too? Let us do some number crunching and look at the fundamentals then and the fundamentals now.

In 2000-01, the markets were trading at a forward P/E (price to earnings ratio) of 35 times while this time they are trading at 16 times. The savings and investments (as a percentage of GDP) which were about 24% that time are now about 35%. The GDP growth that time was 4.35% and now it is 8.73%. Inflation was growing at 7.16% in 2000-01 and is now 4.21% (and is now catching up). What is important is the earnings growth which was (on an average) 4.43% 8 years ago is now between 17-20%. The rally, which at that time was mostly in the Technology, media and telecom sector is more broad based now.

The last 10 years data reveals that while the Sensex now is only 4.1 times of the Sensex then, whereas the total earnings now are 7.5 times of the total earnings then (of the BSE 500 stocks). The EPS (Earnings Per Share) has been showing a growth of more than 30% in the last two years and an average growth of about 25% in the last 5 years. Assuming that the EPS grows by 20% in the next three years, by 17% in the three years after that, 15% in the next block of three years and then by 12% in 2018 and if the P/E ratio stays at 16 times then by 2018, the Sensex should be trading at a value of 63485 in the year 2018. The following table shows what the value of the Sensex should be in each financial year upto 2018 at various P/E levels between 12 and 22, if the EPS follows the growth pattern shown above.

Sensex at 87292 at a P/E of 22 in 2018 is unbelievable. But you never know, with the kind of growth India has been witnessing, that may be very much possible.

The above exercise just goes on to prove that the fundamentals of our country and the Sensex are still very attractive. We should now start to look for buying opportunities whenever they come. A day when there is a gap down opening or a lot of panic should be a good day to start. Buy good blue chip stocks which have excellent fundamentals but have been badly beaten down by the street. These companies, over a period of time, will definitely outperform the broader market.

I remember the time nine years ago when I was doing my MBA and I remember our Portfolio Management professor showing exuberance (and a pleasant shock) over the Dow touching 10000 the previous day. And at that moment I was wondering whether I would ever see the Sensex at 10000 in my lifetime (Sensex was only about 3800 in those days). And I thought that even if I did see Sensex at 10000 some day, Dow would probably be somewhere near 50000 at that time. I didn’t have an idea that when Sensex touched 20000, Dow would have been languishing at 14000 levels. Well, that is history. Lets see what the future holds for us.

Happy investing!!!

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Inflation Rises, Markets Fall

Friday, again turned out to be a bad day for the markets. Just when the global cues were okay and the markets were showing some signs of recovery, we were hit by another bit of negative news. This time the culprit was the inflation data (wholesale price index), which showed that it is now rising with a growth rate of 7%. Gradually, it has started picking up speed too. The markets went down because it seemed imminent that the RBI would soon have to increase the interest rates to control inflation.

Seen above is the daily chart of Nifty. We can see from that chart that between the period Jan 21st to Mar 7th, the Nifty was in a range of between 4800 and 5550. Finally it broke out of that range on Mar 7th, against all expectations and when a target of 4100 was expected, it went into another small range between 4480 and 5000. In the intermediate term, nothing can be said until this range is broken out of. The short term trend has now again changed to down. Stay away from the markets until the trend emerges clearly. Long positions taken yesterday, if any, may still be held with a stop loss of 4480.

Lately, there has been so much talk about the economics of our country. Talk that our country’s economy is growing and that the GDP of the country which was exhibiting a growth rate of 8.5% to 9% has now reduced to about 7%. Also, the inflation index (wholesale price index) which was floating below 5% for quite sometime has now increased to more than 7%. And talk about whether the interest rates should be decreased to reduce the interest rate differential between America and India. Or whether they should actually be increased to control inflation? But, how many of us really understand what all this talk is about? What really is the GDP, what is inflation, how do interest rates affect inflation/GDP? Do we really understand those things or do we leave it all for ‘Dr. Reddy’ and ‘PC Uncle’ to handle? Well, while ‘PC Uncle’ (Mr. P Chidambaram) and Dr. YV Reddy are much more knowledgeable about these things than we are, we should really be knowledgeable enough to know whether they are managing our country properly or not. Knowledgeable enough to know that what they are doing is best for the country. And knowledgeable enough to know that we are not being taken for a ride.

This post is definitely not written to explain all fundamentals of economics and is most definitely not going to go too deep into everything. It is just a very simple mail to make the readers understand a little bit about these economic matters so that they know what all this talk about GDP, inflation and interest rates really is about. At the end of the post, I’m sure a lot of you would still have a lot of unanswered questions. You can please leave all your questions and comments about this post in the comments section below and I will try and address those queries (with whatever little knowledge that I have).

There is an earlier post which has talked about what GDP really is. In layman’s language, GDP is the sum of the total consumption, investments, government spending and net exports. In simpler words, it measures the financial health of a country. When we say that GDP is showing a growth rate of 8% that means that if the GDP today is a trillion dollars, then next year it would probably be 80 billion dollars more than a trillion or $1.08 trillion. But how does the GDP grow?

When we begin to think of a starting point of an economy, we don’t know where to begin with. It’s all like the chicken and the egg story. But let’s begin anywhere. Let’s say that a country is in a deep recession, companies are not able to make profits, they have to cut down production, lay off people and everything looks bleak. Then the central bank reduces the interest rates. This makes it cheaper for the companies to borrow money. Some of the daring ones borrow more money to increase production. This needs additional workforce. The number of jobs increase, the employees start getting money and their spending (on various items like necessities, wants and luxuries – in that order) increases, which increases the sales of the companies. Additional sales means additional profits, which means more production, more jobs and more spending. And suddenly things are not looking all that bad. There are jobs available, the companies’ profits are rising and there is more consumer spending, all of which contribute towards the increase in GDP. Everything is rosy now.

Everything is rosy now? For how long? With so much money available in hand, the consumers are willing to spend on everything, even on luxuries. And they don’t mind paying a little bit additional for anything since they have additional money available. So, demand increases and supplies are not enough to meet all this demand. So, a simple law of economics comes into force and prices increase. This increase in prices leads to inflation. Inflation cannot be left untackled because soon the prices may start rising exponentially. And inflation is the worst enemy of growth.

The only way to tackle inflation is to reduce the demand, which can only be done by tightening the money supply. And to tighten the money supply, the central bank has to increase the interest rates. An increase in interest rates leads to decreased borrowing, which in turn leads to decreased production, lay offs and decreased consumer spending. That leads to lower sales, lower profits and soon the companies again start making losses.

It all starts off with the GDP growth rate coming down and down and soon there is no growth. The expenditures are more than the incomes and the country starts eating into its reserves. That period when the growth rate becomes negative is called a recession. That is what America is going towards, though unofficially people have started saying that it already is in a recession. All these things don’t happen quickly. A full cycle from a peak to a trough and back to the peak again (or vice versa) usually takes between 4-5 years.

US is moving towards a recession. India is not. India still has a growth rate above of 7%. So the rate of growth has definitely reduced from 9% and above to between 7 to 7.5%. That is not recession. Recession will come when this growth rate keeps decreasing to zero and then becomes less than zero. And that is still a long time away.

Presently, inflation is catching up with India and soon the central bank (RBI) may have to increase the interest rates. That will affect the growth rate but inflation is a bigger enemy of the country than a lower growth rate. Mr. SS Tarapore, a noted economist and a former RBI Deputy Governor, in a recent interview on CNBC mentioned that the inflation index “greatly and grossly understates” the extent of inflation which means that if the inflation index is 7% then at the grassroots level (consumer price index) it is actually much more than that and that it is a ‘sin’ to let the inflation increase because it affects the poorer section of the society more badly. He is of the view that the RBI should increase repo rates by about half a percent in one or two steps and should introduce an incremental cash reserve ratio. He says that the younger economists who argue that the rupee should be allowed to appreciate and the interest rates should be lowered are wrong because doing that would be an “unmitigated disaster”, specially for a country like India which still has a fiscal deficit to deal with. He finally ended the interview by saying that there has to be a trade off of “lower interest rates and higher inflation” with “lower inflation and higher interest rates”. According to him that definitely would cause pain but one has to learn to live with the pain.

I hope, after reading this article, things like GDP, growth rate, inflation, interest rates seem to be a lot simpler. In case you still find any difficulty, please feel free to leave your queries by clicking on comments below.

Happy investing!!!

Update: This article was also published on the business and investing page of Reuters.

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RBI Credit Policy Along Expected Lines

The Nifty again remained volatile today, as was expected. The RBI Credit Policy announcement today made it all the more volatile. With a 75 basis points cut by Mr. Ben Bernanke, the US Fed Reserve Governer announced last week, some people in India were expecting a rate cut too, at least a 25 bps cut, if not more. But our RBI Governer, Dr. Reddy, is a tough economist and did not follow the Bernanke route and left all key policy rates untouched. But even though there was no rate cut, yet, the Credit Policy had a more neutral stance this time as against the hawkish stance it took last time.

The rate cut not being announced today brought down all the banking stocks and the two banking charts in our newsletter yesterday, which were looking good till the policy was announced, remained underperformers. However, Tata Tea, which was also recommended yesterday, was on fire today and went up by 7.2% to close near 850 after touching a high of 895.

Coming back to the RBI Credit Policy, in short, it looks like this:

• RBI keeps key policy rates unchanged
• RBI keeps repo rate unchanged at 7.75%
• RBI keeps reverse repo rate unchanged at 6%
• RBI keeps CRR unchanged at 7.50%

A lot of people were expecting that the RBI Governer may not announce a rate cut just yet and the arguments given by him were what many expected. That money supply is at 23% against a target of 17-17.5%. This means, basically, that too much money in the system can always ignite inflation, and therefore a caution on that area was required.

Abheek Baruah, the Chief Economist at HDFC Bank had the following words to say.

• “With the kind of clarity that has come from the policy where the RBI is not likely to tighten further, perhaps banks could take advantage of this and reprice both lending and deposit rates."
• "I think growth hasn’t slowed drastically enough to completely offset inflation worries and I think across the world, the Fed and perhaps the Bank of England being an exception, most Central Banks seem to emphasise inflation concerns rather than concerns about slowing growth. This could change if the US indeed plunges into recession and there are ripple effects across the world. As of now, the tilt is towards inflation among most Central Banks but this could change going forward and I would think that the second half of this calendar year might just look very different.”

In a nutshell, this is what the RBI credit policy had to say.

• Headline inflation picked up since December 2007
• Liquidity management to be priority for policy
• Inflation to go up even if fuel prices remain unchanged
• Upside risks to inflation to increase going ahead
• Flexibility to change reverse repo, repo rates
• CRR unchanged on preview of current liquidity situation
• Financial markets warrant careful monitoring on large forex flows
• Emphasis on price stability, anchoring inflation
• Retain inflation aim of 4-4.5% for FY08, 3% in medium-term
• To maintain GDP growth target of 8.5% for FY08
• Can't exclude likely Forex flows reversal on global sentiment

That's all for today. Trading opportunities will be identified in tomorrow's newsletter. No trading opportunities studied today.

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