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Straight from the Specialists

India market weekahead – Watch out for Greece and RBI policy review

By Ambareesh Baliga
June 17, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The markets remained highly volatile during the entire week as investors remained ambivalent about the likely outcome of the elections in Greece and the Reserve Bank of India (RBI) policy meet.

Concerns again emanated about India’s ‘long-term growth story’ from the warning issued by Standard & Poor’s that India could become the first BRIC nation to lose its coveted investment-grade rating if it doesn’t revive its growth and push the pedal on reforms.

Global indices too rallied on reports the central banks of major economies are ready to provide liquidity if needed after the crucial elections in Greece.

Two key economy data sets — the index of industrial production (IIP) and wholesale price index (WPI) inflation — the key deciding factors for the RBI, gave contrasting signals. Inflation accelerated to 7.55 pct in May 2012 from a year earlier. Once again, the markets chose to look on the brighter side. A weaker than estimated IIP growth of 0.1 pct substantiated the argument of a repo rate cut.

The coming week will be action-packed with key trend deciding events playing out. The monetary policy review meet is potentially the most important event for our domestic markets as the economy is stuck in a stagflation scenario. Secondly, the Greece election outcome on Sunday will decide whether the nation will remain in the euro zone.

The Federal Open Market Committee holds its next policy meeting on June 19-20. It remains to be seen if the Fed extends Operation Twist launched in September 2011 to lower long-term borrowing costs and expires this month. In addition, a key summit of the European Union is scheduled on June 28 and 29 to discuss the ongoing European debt crisis.

Though the Indian market has now discounted even a 50 bps rate cut and a Cash Reserve Ratio (CRR) cut of 25 bps, we feel that a CRR cut is the best operational tool in the current scenario along with a token repo rate cut of 25 bps. The RBI commentary would indicate the way ahead in the easing cycle and the equity market could react positively in the short term. However, in the longer term, larger action from the government in the form of implementing important reforms will likely determine the market trend.

An important political development during the week seems to have raised the hopes of policy action by the government in the next few weeks. Trinamool Congress chief Mamata Banerjee, the bête noire of the UPA, was finally isolated with the Congress announcing Pranab Mukherjee’s candidature for the presidential elections. The market hoped that this would signal a change in the political alignment which could push through policy action.

As I mentioned a few weeks ago, the government won’t have a choice but to push through the reforms and get the economy on track if it is serious about winning the 2014 polls. It will have to generate employment which means infrastructure projects need to take off, hence a conducive investment climate needs to be created in addition to removal of operational bottlenecks at the ground level. Unless we see any action towards this in the next 2-3 months, the ‘India Story’ may be relegated to history.

The markets have factored in a positive Greece election outcome and a RBI repo rate cut along with a CRR cut. From a sentimental perspective, markets seem to be poised for a favourable outcome on both fronts, hence the Nifty could rally to 5300-5400 in case it materialises. And further, any movement on policy front at the ground level could keep the momentum going.

As mentioned last week, any disappointment on these events, especially on RBI policy, could arrest the current run-up in the Nifty and we could see a decline to around 5000 levels in a short span but the hopes on policy reforms will provide a cushion at least for the next few weeks.

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