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February 2012

The equity markets represented by S&P CNX Nifty bounced back in the New Year and posted 12.4% returns for the month supported by positive global cues and healthy foreign institutional investors (FII) inflows of Rs 11,089 cr. Some of the other key market drivers for the month were a) Central bank's move to cut the cash reserve ratio (CRR) by 50 bps, b) Better than expected Q3FY12 result of sectors like banking and Auto, and c) Negative food inflation numbers for December driven by low base and seasonal factors and healthy FII inflows leading to sharp rupee appreciation against the dollar.

Euro zone concerns seems to have subsidised as the European Central Bank (ECB) has pumped in liquidity by giving loans to European banks under a three year lending program. Also, the IMF announced that it plans to increase its lending resources to $500 bn to prevent global crisis. Both the measures led to sharp decrease in sovereign bond yields of countries in Europe.

In line with the benchmark index, all the sectoral indices posted positive returns in January. BSE Bankex posted one of the highest returns of 24.4% primarily driven by a cut in CRR by 50 bps to 5.5% which is expected to infuse around Rs 32,000 cr of liquidity in the banking system and hinting towards monetary easing by RBI in the future. Also the results declared by private sector banks were encouraging but public sector banks were muted. HDFC reported 31.4% growth, ICICI bank’s reported 20% growth, AXIS bank reported 13% growth whereas Punjab National Bank reported only 5.5% growth in net profit y-o-y.

BSE Capital goods index posted a return of 22.3% for the month driven by good results. L&T reported better than expected profit after tax (PAT) growth of 22%. BSE Metal index posted a positive return of 23.7%. Metal stocks gained because of increase in commodity prices due to reduction in risk aversion. BSE Realty index posted a positive return of 24.2% driven by the CRR rate cut. BSE IT posted lowest returns of 0.4% in January driven by weak growth outlook guidance. Infosys, which was the first to declare results, cut US$ revenue growth guidance for FY12 to 16.4% from 17.1-19.1% earlier. TCS and HCL Tech also maintained a cautious stance. A firm rupee also weighed on IT stocks. 

CRISIL Research expects the Indian markets to be driven by global factors in February. Investor confidence has improved after the European Central Bank announced a three-year lending program for banks and the Federal Reserve said it will keep benchmark interest rates low. The outcome of the assembly elections in UP, Punjab, Uttarakhand, Goa and Manipur and also expectation from the budget will also influence investment activity.

CRISIL Research believes that local factors may take precedence over global. The current market is primarily driven by liquidity and has peaked; CRISIL Research expects a moderate correction in the market. The S&P CNX Nifty is expected to end the month in the range of 4,950-5050 (BSE Sensex 16,350-16,650).