MUMBAI: The week ahead has enough in it for stock market investors to be on their toes. The Reserve Bank of India’s (RBI) monetary policy review on Tuesday, when the central bank will unveil its outlook on interest rates, inflation and economic growth, will set the mood for the market this week.

Volatility is expected to heighten, as investors and traders will shift their futures and options contracts to the November series ahead of the October series expiry on Thursday.

While most bankers believe the RBI on Tuesday is likely to leave rates and even the cash reserve ratio (CRR) untouched, market participants are not ruling out a hike in the CRR — the cash that banks need to store with the central bank — by 25-50 basis points.

“It will not come as a surprise if the RBI hikes the CRR, as inflation will soon turn out to be a real concern, going by the amount of liquidity in the system,” said Anand Shah, head, equities, Canara Robecco Asset Management.
An immediate absorption of money supply from banks is what investors are concerned about, as the demand for loans still lags deposit growth, indicating that consumers are not yet spending. Investors fear that tightening of money supply, which will make borrowing costlier for companies and consumers, may delay the revival in economic growth
Mr Shah said a CRR hike need not trigger a fall in stocks, but adds that a correction is due. “The moment it (a correction) starts, it could be a bit severe, as many bulls are leveraged,” he added.

Analysts said leveraged traders are already concerned over the Nifty’s inability to stay above the 5000-levels. “The composition of rolled-over positions to November will be interesting, as it will give a picture of the undertone of the market,” said a derivatives head of a foreign brokerage.

Shares of banks may rise, if the RBI on Tuesday hikes the ceiling on the portion of government bonds that banks can park in held-to-maturity (HTM) category. The move will benefit banks, as government bonds in this category need not be marked-to-market, which means the prices of securities in the segment are insulated from the volatility in the market.

“The market is expecting an increase in the hold-to-maturity (HTM) investment limit in government bonds from the current 25% of net demand and time liabilities to around 26-27%,” said Sonal Varma, economist with Nomura.