Bank stocks are likely to stay firm in the coming week, after the smart rally seen today. Short covering in PSU (public sector) banking stocks may continue and the Bank Nifty is expected to remain positive till it holds above 10500. In such a scenario, it may test 11000 on the higher side. Bank Nifty surged over 4% as traders covered short positions following the government's move to hike diesel prices.
Market participants believe that yesterday inflation data and the likely impact of diesel prices on inflation in the coming months will leave little room for the Reserve Bank of India to ease policy rates. India's headline inflation rate based on the Wholesale Price Index shot up to a two-month high of 7.55% in August, from 6.87% in July.
The final inflation rate for June was also revised upwards to 7.58% from 7.25% earlier. We see significant revival in headline inflation (range 8.1%-8.4%) in months ahead and retain our full year estimate for headline inflation at 7.8% YoY.
However, they will eye the central bank's remarks on the economy and its stance on inflation. While we do not anticipate any rate action in the mid-quarter review scheduled for next week, we expect the RBI to cut repo rate by a cumulative of 50 bps in Q3 FY13 (Oct-Dec) and remain on pause thereafter.
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