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Straight from the Specialists

India Market Weekahead: Ride the election rally with some caution

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

The Nifty touched a high of 6758 during the week, part of a market rally for 10 consecutive sessions – the longest streak in five years.‎ An overdue correction set in towards the end of the week with the Nifty ending flat at 6694.

Advance-decline data suggests that interest is shifting to the small and mid-cap space where advances outpaced declines. Although we are touching new highs, the missing euphoria indicates investor caution  that is good for the health of the market.

As expected, the Reserve Bank of India maintained the status quo at its policy meet but the commentary was more hawkish. The El Nino effect on the monsoon would be watched closely by the central bank governor as well as market participants as this could negate the possible election outcome of a stable government.

India’s core sector grew by 4.5 percent in February compared with 1.6 percent in January but HSBC PMI manufacturing data for March dipped to 51.3 points from 52.7 points in February. Services PMI touched a three-month low of 47.5, indicating a contraction.

How much inflation is good for growth

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

The RBI has left it to the government to decide the inflation target since it considers it politically sensitive. The central bank will accordingly modulate its monetary policy to ensure that the government’s target is not exceeded.

Targeting inflation alone cannot be the sole objective of monetary policy, though it is an important criterion for regulating the repo rate. Even developed countries have concerns about inflation – when it is too low or too high.

Interest rates likely to remain high

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(Rajiv Deep Bajaj is the Vice Chairman and Managing Director of Bajaj Capital Ltd. The views expressed in this column are his own and do not represent those of Thomson Reuters)

The Reserve Bank of India (RBI) raised its benchmark repo rate by 25 basis points to 8 percent at its policy review meet in January. The reverse repo rate rose to 7 percent while the bank rate and marginal standing facility rate climbed to 9 percent. This is the third hike in repo rate since RBI Governor Raghuram Rajan assumed office in early September.

Why the RBI raised interest rates

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

The Reserve Bank of India (RBI) raised interest rates at its review on Jan 28. The justification usually given for doing so is inflation.

But at its previous review, when inflation had soared, the RBI was passive and left rates unchanged. Now, with wholesale price inflation (WPI) slowing to 6.16 percent, the RBI was quick to raise the repo rate by 25 bps back to its highest level since the 2008 crisis. Why?

India Markets Weekahead: Investors to remain bullish in election season

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

A surprise decision by the Reserve Bank of India (RBI) to keep the repo rate unchanged and a dovish statement from Ben Bernanke in his last news conference as U.S. Federal Reserve Chairman improved sentiment with the Nifty closing 106 points higher at 6,274.

Markets tottered for three days during the week amid fears the Nifty could break a crucial support zone between 6,120 and 6,140. Investors had discounted a 25 bps hike in monetary policy based on inflation numbers that were the highest in 14 months. RBI Governor Raghuram Rajan should be lauded for taking a practical stance as food inflation is expected to cool considerably in December due to improved supplies and the monsoon effect.

Which inflation should the RBI target?

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The Reserve Bank of India (RBI) is entrusted with the responsibility of maintaining price and financial stability, and it has used interest rate and money supply to pursue this objective with unwavering determination. Yet, inflation has survived with matching persistence.

The index that the RBI uses to target inflation is the wholesale price index (WPI), which is the combined price of a commodity basket comprising 676 items. A few prices in this basket can be too volatile or outside the scope of the RBI’s monetary policy, leading to poor results.

Need to rebalance RBI’s interest structure

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

In its mid-quarterly monetary policy review last month, the Reserve Bank of India (RBI) made some hasty changes in the interest structure. The repo rate was raised possibly because of the rise in inflation and the marginal standing facility (MSF) rate was cut after the rupee recovered against the dollar. The interest structure is still lopsided with short rates exceeding long rates. This anomaly needs to be corrected.

It is believed that the economy is susceptible to a rundown when short rates exceed long rates. A further slowdown, in any case, needs to be prevented and is quite feasible since the compelling conditions that necessitated an interest hike have been contained. There is now enough room for the RBI to restore balance.

Was the repo rate hike necessary?

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The decision of the U.S. Federal Reserve to delay tapering its bond purchases cheered markets, and more so in India because they were convinced of a second bonanza from the RBI. But new Governor Raghuram Rajan gave the markets a jolt by turning hawkish and increasing the repo rate.

The gains of the previous day following the Fed meeting were nearly wiped out and the rupee, which was steadily crawling towards 60 to the dollar, also fell back. The only reason why the RBI increased the repo rate was the revival of inflation, which had dropped to less than 5 percent in April-June.

Indian markets at risk but elections could spell change

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

It’s been an eventful September so far for India. The Indian parliament cleared key economic legislation in its extended session. The Reserve Bank of India saw a new governor taking charge. FII flows reversed trend to turn positive in equity and debt markets. Volatility in the currency market subsided and the rupee staged a recovery from historic lows. Near-term bond yields shrank and the August trade deficit came in lower as exports climbed. The Syrian crisis seems to have abated. Does this mean that the worst is behind us and things will start improving?

As discussed in my previous column, some of these actions from the Indian government and the central bank seem like quick fixes to set right deteriorating macroeconomic numbers. India’s Q1 GDP is now at 4.4 percent, much lower than expected, and FY14 GDP growth is expected to be below 5 percent. The rise in interest rates on account of the central bank’s measures to lessen currency volatility will definitely affect GDP growth in the remaining three quarters. Monthly IIP and PMI numbers are not encouraging either. Both WPI and CPI inflation are not yet stable. Headline inflation soared to a six-month high in August. Input costs for the consumer staples basket are set to rise due to currency depreciation, which could have an impact on consumption volumes. On the oil subsidy front, rupee depreciation has again increased per unit under-recovery on diesel, kerosene and cooking gas. The urgent need for a substantial increase in diesel prices could eventually have a dampening impact on growth.

India Market Weekahead – Volatility expected ahead of RBI policy review

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(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.

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