India Markets Weekahead – Volatility seen as RBI policy review in focus

June 16, 2013

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Volatility is here to stay and trying to predict the markets on a daily basis is a futile exercise. It’s no better than tossing a coin.

Monsoon rains are early and heavier then normal, raising the hopes of green shoots in the next few months. Macro numbers were showing signs of bottoming out but the rupee slide has thrown calculations awry. A feeble request by the finance minister urging people to shun gold won’t do much good in a country enamoured by gold.

An amnesty scheme would have been one of the ways of shoring up foreign exchange reserves but the affidavit filed along with the Voluntary Disclosure of Income Scheme in 1997 bars the government from launching a similar scheme.

Benign inflation figures would have encouraged the Reserve Bank of India (RBI) Governor to cut rates further but inflation in terms of currency depreciation could deter him from doing so. The delay in economic recovery may lead to further non-performing assets that could add further stress to bank balance sheets.

The first instalment advance tax figures seem to have an uptick of about 5-10 percent, mostly from the financial sector but manufacturing sector numbers could take a hit. The results of the quarter ending June may not live up to expectations due to currency-related provisions.

U.S. Fed chief Ben Bernanke’s statement would be keenly awaited next week for clues on the pullback of a stimulus program, if any. An indication of a pullback would have a knee-jerk reaction both for equities as well as the dollar. Oil has been inching up and with a weaker rupee, I expect further raises in petrol prices in addition to the weekend hike of two rupees. Spain’s public debt is creeping towards 90 percent-plus of its GDP and the euro zone could take measures again.

An outlook upgrade by Fitch Ratings was a shot in the arm for India but consumer confidence seems to be taking a hit. Car sales fell 12.3 percent in May and the pressure is apparent with a discount spree in FMCG and consumer durables.

The political heat is increasing as we inch towards election season. The market would be indifferent as long as the incumbent government is progressive and continues with reforms leading to a healthy GDP growth of over 8 percent in the next three years. A study of the last 20 years of market behaviour prior to elections holds out a hope that markets tend to rally between a month to six months before elections.

The trust deficit seems to be rising at an alarming pace. This can be seen from the way investors have been shunning the mid-cap and small cap segment of the market. In three decades of tracking the markets, I have not seen investors being so skeptical of promoters. Corporate governance issues that have come to light in the last few years have left investors painting all of them with the same brush. Going ahead, promoter-managers would have to prove they are acting in the best interests of co-shareholders before investors take them seriously.

Even Narayana Murthy, a proponent of corporate governance in India, would be going through a “trial by fire” in the coming months. A cleansing of the system seems underway and a new bull run may have fewer participants. This will also mean that part of the equity portfolio that has depreciated in the last few years will finally be written off.

The markets would be volatile again with both the Reserve Bank and U.S. Fed policy announcements next week. Markets have absorbed the shock of the rupee being in the 57-59 range against the dollar so I don’t see a further crack. The upside seems capped at around 5950-6000 as analysts would be revising expectations of June quarter results, whereas the visible bottom seems closer to 5600.

I don’t expect further reforms as the government enters its final leg. The food security bill would be an overhang on already precarious deficit figures. FII liquidity, a redeeming feature of the last few months also seems to be tapering off. I had suggested investors should continue booking out when the markets were touching 6100. It may not be time yet to start fishing, so hold your cash for a few weeks.

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