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Pre-budget correction playing out – Merrill

January 31, 2010

A pre-budget correction in the Indian equities market is playing out with the rise of CRR. Analysts expect a market consensus on increased excise duties in the budget in February end as the Government scales back its fiscal stimulus program. Bofa-Merrill sees a weakness in the markets over next few weeks in the run up to the budget that may offer a better buying opportunity.

Merrill Likes the Banking Saga – expect a stronger credit growth to drive earnings and stock performance in banks in spite of the negative impact of rising yields. Easing fears of NPLs and repricing of high cost deposits will further support bank stocks. Spike in yields remains key risk; but not not expecting that given high liquidity and weak credit off-take. Preferred picks are ICICI Bank, SBI and HDFC Bank. Others incl. PNB and OBC (small cap).

Bofa-Merril’s expectations for repo rate is 7.25%, reverse repo of 5.75% and CRR of 7.5% by end of April 2011.

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