Pick stocks with potential

The last few weeks have been quite good for the markets in general. There has been a positive trend in the markets thanks to a push from the companies' results (many large companies have declared a good set of numbers) as well as the Reserve Bank of India's (RBI) Credit Policy.

The market volumes are good and advance-decline ratio is in favour of advances. Foreign institutional investors (FII) numbers shows that they are buying in the market but their buying is limited to certain selected counters only.

The inflation rate is above seven percent from the last one month. Both the RBI and the government have made some key announcements last week to control the soaring inflation rate.

These are the highlights of this week's announcement made by the government and RBI:

Cash reserve ratio

The RBI raised the cash reserve ratio (CRR) by 25 basis points to 8.25 percent with effect from May 24. This 25 basis point hike is in addition to the 50 basis points CRR hike announced a couple of weeks ago, which is to be implemented in two 25 bps installments on April 26 and May 10. The RBI has left the repo and reverse repo rates unchanged at 7.75 percent and six percent respectively

GDP target

The RBI revised the GDP growth target downwards to 8-8 .5 percent.

Inflation range

The RBI has revised the Wholesale Price Index (WPI) based inflation range upwards from 4.5-5 percent to 5-5 .5 percent.

Duty on steel

The government has imposed an export duty on steel exports. This will impact exporters operating in steel sector negatively.

IT tax holiday

The government has extended the tax exemption for IT and BPO companies under the Software Technology Parks of India (STPI) upto March 2010. This is an extension for one more year from the earlier deadline of March 2009.

The markets and analysts were pleasantly surprised by these announcements by the RBI and government. With the inflation rate hovering above seven percent and showing no signs of cooling off, many analysts and market participants were expecting the RBI to take harsh steps.

They expected the central bank to increase the repo rate by at least 25 basis points. But the RBI left the reverse repo and repo rates unchanged, surprising many in the market. Raising the CRR in steps (0.5 percent earlier followed by 0.25 percent) clearly suggests that the RBI was thinking of a larger CRR hike earlier and decided to spread out the impact on the markets.

Analysts believe the inflation rate will continue to remain high for a few weeks due to the base effect from last year and rising commodity prices (especially crude oil) in global markets. Many analysts are not comparing the WPI index from their last year levels but are looking at week over week tick movement in the WPI index.

The current inflation level of seven percent is factored in by the market. Analysts believe that the markets will not fall much if we get a couple of weeks with a seven percent plus inflation numbers but the market may inch up a bit if the rate of inflation goes below the seven percent level.

Currently, markets have factored in most of the positive news. Since the results season has almost come to an end and not many news bits are expected to be coming out in the next couple of weeks, there could be some correction or consolidation in the markets. It would be a good time to look at your portfolio and pick some stocks which have potential in the current market conditions.

Via Economic Times