The key triggers for Indian equities are likely to be in the form of a) peaking of the domestic inflation and interest rate cycle and b) restoration of some degree of certainty in global markets on the back of structural reforms in the Eurozone. Hence, in the short term, Indian equities are likely to gyrate depending on global cues, despite reasonable valuations.

However, over the longer term, we remain confident on the long-term prospects of the Indian growth story due to benefits of demographic dividend, a primarily internal consumption-driven economy, better positioning vis-à-vis peers, reasonable earnings growth trajectory and reasonable valuations in the context of India's structurally positive outlook. In the near term as well, cooling global commodity and energy prices also bode well for the Indian economy and are likely to lead to peaking out of the WPI inflation cycle in September 2011. Inflation is likely to see meaningful deceleration from January 2012. As inflation peaks out, we expect the interest rate cycle to peak out with expected policy rate cuts from CY2012 to stimulate the moderating domestic growth momentum.

Eoin Treacy's view The tightening bias of the RBI has been a headwind for the Indian stock market since the beginning of the year. A moderation of inflationary pressures would allow the central bank to reverse its stance which should act as a tailwind for the stock market.

The Bombay Banks Index has been a leader since the 2009 low and hit a medium-term peak ahead of the wider market. If found at least short-term support near 10,000 last week and improved on that performance today. A narrowing of the oversold condition relative to the 200-day MA is an increasing possibility. A sustained move above 12,000 would likely indicate a return to medium-term demand dominance. The Nifty Index has a somewhat stronger chart pattern.

The Bombay Fast Moving and Consumer Durables sectors have lost momentum over the last year but remain above their respective 200-day MAs and have held progressions of higher reaction lows. This is impressive relative strength in the context of weakness in the wider market and these should be among the first sectors to sustain moves to new high ground once risk appetite begins to recover. The chart patterns for the Healthcare and Auto sectors are not as consistent but they remain relative strength leaders.