Nifty to gyrate between 8100 - 8400 amid volatility

First week of 2017 saw 'equities and bullions' being top performing asset classes globally. Our equity market continued its upward trajectory for second week in succession. Nifty index gained around 0.71% in follow up to prior week's gain of around 2.50%. Strong buying traction was seen in realty, metals, energy, automobile, infra, media stocks in general while IT, financials and PSU bank stocks came under selling pressure. Cherry picking in mid and small-cap basket was the flavor. Significantly, there was marked slowdown in foreign institutional investors (FII)'s selling spree in cash segment towards the end of week. FII's turned net buyers of index futures, aggressively added index call options while remained marginal buyers of index put options. Bullish traders will take much needed comfort from this shift in positioning of FII's trading bets.

Ensuing week marks the beginning of Q3FY17 earnings update. Few private sector banks and IT biggies will be coming out with their quarterly performance update. For IT company's after a seasonally strong 1H offered nothing to write home about, compounding of furloughs in the third quarter keeps our expectations muted. The situation would be further accentuated by the depreciation of pound, euro, Australian dollar and Japanese yen against the US dollar.

The brunt of client specific and other issues has been evident in Infosys termination of a contract with RBS' standalone UK bank, Williams & Glyn (W&G), leading to gradual ramp down of as many as 3,000 employees, which is expected to kick off in 3Q. Mindtree's revenue decline in 2Q, and lack of visible revival in 3Q from top client spending bumps, pricing pressure and delayed ramp-up of projects. Wipro's organic growth guidance of -1% to +1% for 3Q cast a lengthy big shadow on deteriorating macros of IT industry.

Lest the macro turns for the better, we see limited upside triggers for the sector over the near term. For Banks, this will be an unusual quarter marked by several moving parts such as sharp CASA uptick, weak core profitability and high trading gains. We believe the current quarter cannot to be extrapolated, however benefits of demonetization - improved CASA ratio and low interest rates (led by low inflation) are here to stay.

On the fillip side, demonetization is likely to have higher impact on loan growth, where a slowdown is expected. Rather than the current quarter earnings, management commentary on business growth in the ensuing quarters (with more data in place) is important. Our top picks will be IndusInd and YES amongst private banks; SBI and Bank of Baroda amongst PSU banks; and RBL and Equitas amongst emerging banks.

In light of earning season kicking off for Q3FY17 which was marked by unprecedented event of demonetization, we expect volatility to come back. Value buying and light trading positions are will be flavor for the week. Nifty is likely to be range bound within a zone of 8100 to 8400.

The writer is head –retail research, Motilal Oswal Securities Ltd