India Market Weekahead – Volatility expected ahead of RBI policy review

September 15, 2013

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

After a rally of 500 points on the Nifty, markets consolidated at slightly higher levels to close at 5850 this week. It’s evident that hope keeps the market ticking — this time it was various measures by the new RBI governor, Raghuram Rajan,that cheered the markets.

But expectations, at times unrealistic, could lead to disappointment. Though Rajan made the right moves, it would be interesting to see how he uses the limited manoeuvrability he currently has. The monetary policy review on September 20 would be closely watched.

Macro numbers such as IIP and consumer inflation were better than expected at 2.6 percent and 9.52 percent. Trade deficit narrowed to $10.9 billion while car sales rose for the first time in 10 months. Although IIP data was positive, a closer look shows capital goods growth, which has been highly volatile, was responsible for the better-than-expected numbers.

Consumer inflation showed divergent figures between urban and rural data. The trade deficit narrowed thanks to a restriction on gold imports while car sales were up on Maruti’s low base after being hit by strikes last August.

The rupee made a smart recovery in the last few days to 63.36 against the dollar. This was aided by Rajan’s measures to attract foreign exchange. He opened FCNR swap facility for banks to reduce their hedging costs and increased limits for overseas borrowing by banks, which could be swapped with the RBI at 100 bps lower than the prevailing rate. SEBI did away with auction process in the debt market for FIIs. This should ease the flow of FII funds into the debt market. All these measures should bring in substantial overseas funds, both from NRIs as well as FIIs.

Globally, euro zone recovery has been broad-based and is on track. A few hiccups could surface as Slovenia could be next in line for a bailout due to liquidity issues. Syria could be put on the back burner as an agreement has been worked out for seizing its chemicals weapons. The FOMC meeting scheduled for September 17 and 18 would indicate the timing of QE tapering.

The RBI monetary policy review on September 20 would be the biggest event of the week and could be a deciding factor for market direction in the short term. Though the market rules out the possibility of a rate hike, there are hopes of a rate cut. Status quo will disappoint the market, which could be balanced by a dovish speech from the central bank governor.

I believe the structural issues which are stalling economic growth are beyond the realm of the RBI. The political class is already in election mode, thus long-term reforms may not be feasible. The BJP’s announcement of Narendra Modi as their prime ministerial candidate was on expected lines.

Markets would remain volatile within a range in the coming week but we could see a sharp reaction after Friday’s monetary policy review. The recent gains on hopes of a stimulus from the RBI governor could be short-lived. Most of us missed this unexpected rally. Instead of ruing a lost opportunity, one should lighten the portfolio. A new bull run, if at all it happens, will not start till international investors are convinced about the stability of the next government. Volatility is bound to increase as we get closer to the elections and that would give enough opportunities to re-enter the market at lower levels.

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