India Markets Weekahead: Outlook cautious, look overseas for cues
The markets were in no man’s land despite the high volatility in an important monetary policy announcement week. The Reserve Bank of India’s (RBI) policy action was in line with market expectation of a 25 bps rate hike, though a section of market participants felt there could be pause.
The RBI maintained that it will continue its anti-inflationary stance till the time there are signs of downward movement in the inflation trajectory. Going by the hawkish stance, we believe that we might see a rate hike in October before we come to a pause. Inflation should start heading southwards from Q3FY12 mainly due to base effect.
Another key event during the week was the depreciation of the rupee which dipped to a two-year low close to 48 rupees against the dollar as India relaxed its overseas borrowings rules and allowed companies to refinance rupee debt through overseas borrowing. The rupee will continue to be weak, however further losses from current levels doesn’t seem likely unless credit conditions deteriorate severely, which is not expected.
The Indian government once again deferred the mega USD 2.5 billion FPO of ONGC, which was supposed to open on September 20. The government expectation on the issue price was not in sync with the market. The mention of an FPO is a value destruction proposition in the short-term for the issuer company unless SEBI overhauls the issue guidelines.
With limited cues locally, the market participants are expected to look overseas for direction. The markets on Monday are initially expected to react to the outcome of the two-day meeting ending Saturday of euro zone finance ministers in Poland. The euro zone will inevitably be extremely important in the short term. There is a strong belief that Greece could still default.
The focus is likely to shift to the outcome of a two-day Federal Open Market Committee (FOMC) policy review meeting on Tuesday and Wednesday. It remains to be seen whether the Fed announces further measures to revive the U.S. economy.
The medium-term outlook for Indian markets continues to be cautious.
The weak trend is likely to get negated in case Nifty manages to close above 5250-5300. We are advising investors to focus on quality large-cap stocks and invest in a staggered manner over a period of time especially on the down-tick days.
We are noticing an increasing appetite for emerging market bonds and it’s only a matter of time before the risk appetite for emerging market equity increases as funds hunt for better returns. As we are witnessing a sense of consolidation in this range of 4750-4800 to 5200-5250, we could see return of confidence over the next few weeks in absence of any major shocks from the western world and that could confirm that the bottom was formed at 4750 levels a few weeks back.