The market rally is showing signs of further extension, supported by mid and small caps. High-frequency data such as GST survey and PMI have shown a good start to FY23. Crude oil prices have declined, giving an advantage to the performance of the Indian market. We expect the RBI to hike the repo rate another 35-40 basis points at the June meeting. However, we won't be surprised if they choose to take rate hikes slowly as the government is also reacting to inflationary risks. The recent announcement of fuel tax cuts and cuts in import tariffs on cooking oils will offer some consolation to the RBI. RBI's surprise CRR rate hike earlier in the month has fueled expectations of another CRR rate hike in June policy. However, excess liquidity in the banking system has fallen sharply over the past three weeks. Currently, the net excess liquidity parked under the RBI's LAF window is close to Rs. 3 trillion. We believe RBI will be comfortable with this level of liquidity at this point. Therefore, it can leave the CRR rate unchanged. The bond market is already positioned for early rate hikes. The broader market expectation is that the RBI will rise by around 40-50 basis points at the June meeting. Any small rate hike will be a positive surprise and short-term bond yields could fall slightly. However, much will depend on central bank policies in India and the US, which will be announced in the next two weeks. Nifty is expected to remain range bound while Bank Nifty could outperform. Traders are advised to use a buy-on-decline strategy in the support zones. At this point in time, we recommend selective stocks.
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