A week is too long not only for politics but proving to be that way in the financial markets as well. What a fantastic week it had been, dominated by two Central banks, the Federal Reserve and the RBI. And both lived up to the saying, "expect the unexpected" in the perfect sense.
On the one hand, the world had expected the Federal Reserve to start the "tapering" of Quantitative easing which has been around 85$ billion bond purchases a month. But the big Ben held on to the status quo offering breathing space to gold and emerging markets equities. On the other hand, the most celebrated RBI governor Dr Raghuram Rajan delivered an unexpected googly, in the form of repo rate hike, and of course he reduced the MSF rate. Again markets were surprised and blinked on both the days. The result, Federal Reserve's decision pushed the equity markets higher and the single day rise was the best in last 3 years. And yesterday, markets crashed on the action of RBI. Contrasting days indeed.
Overall it has been an eventful week for Indian equities, which measured by Nifty, crossed the 6000 mark in a quick manner. Just few weeks back Nifty was languishing at around 5100 levels and people started writing obituary columns for the Indian equity markets. But then the rupee was also terribly bad during that phase. Then came the "rockstar" raghuram rajan to lift the market sentiments and rupee too recovered. Since then no looking back for the markets till this week.
On the economy front, there has been a sharp rise in the headline inflation and the food inflation which led to the repo rate hike by the RBI. Indian economy is indeed facing multiple headwinds in the form of rising inflation, slowing growth, risks in fiscal situation and markets have been on the roll just on the back of strong inflows from the FII side. With the rise in repo rates interest rate sensitive sectors like Banking, real estate, auto, infra will bound to correct sharply in the coming days plus markets also had a big run in the last 10 days which needs a course correction.
Gold prices internationally got a breather on the Federal Reserve's decision to postpone tapering. Prior to the decision the gold prices declined below 1300$ an oz, but came back strongly after the Fed's announcement. But the Federal Reserve cannot keep the QE 3 endlessly and if markets are to be believed, December is the month Fed may act on tapering and gold will also lose its support.
Going forward, Indian equity markets are entering yet another zone of uncertainty and volatility in the near term. With repo rates being hiked, bank stocks will continue to remain under pressure. As highlighted earlier, fundamental economic concerns continue to remain in the system and was well articulated by the RBI governor himself. As such the government has to "walk alone" in the growth path for the time being.
As far investors, caution should be the buzzword. We are also entering the election phase which means quite a lot of uncertainty in the near term. Good monsoon is the lone saving grace for the economy. FII flows need to be watched in the coming weeks as Fed's decision gives some more opportunity for the FIIs to invest in emerging markets like India. Stock selection will key and choosing the right time will be critical.
Cheers!
Gopalakrishnan V, Founder & CEO, Money Avenues.
Investors would be the most confused lot now not knowing what is the way to handle the markets. And their concerns are relevant and reasonable. A fortnight back, when markets touched 5200 levels in Nifty, almost everyone wrote obituary for the Indian equity markets. But the first day of Dr Rajan triggered a swing back in the rupee and the equity markets as well. Then came the surprise from Fed Reserve which held back the bond buying program triggering a huge rise in the emerging markets incl Indian equities.
What should the investors do now?
There is a saying in financial markets, "Loss of Opportunity is better than loss of Capital". It holds good now, as markets are expected to correct further and markets have limited reasons to go up from the current levels. The only possible reason which can push up the markets would be FII flows which can come back strongly after the non decision on Fed tapering. But the economic fundamentals are as weak as ever which was reinforced by RBI's repo rate hike. Inflation continues to frighten the govt and the common man alike and clearly RBI has put inflation control on the priority list.
Federal Reserve's tapering is a question of when and not why, as US economy is going from strength to strength and Indian political scene can get chaotic towards the elections.
The buzzword for the investor should be CAUTION....
- Gopalakrishnan V, Founder & CEO, Money Avenues.
The saying fits perfectly for the Central banks world over. The other day when the world was expecting a Fed tapering, Fed Reserve gave the unexpected by maintaining the status quo on bond purchase program. And now when markets expected RBI to be soft on monetary policy, Dr Rajan delivered the unexpected by hiking the repo rate. When Dr Raghuram Rajan said he does not have a magic wand to reverse the negative trends in the Indian economy, people thought he made such a statement out of modesty and they indeed expected a magical act from the RBI governor. But today, he did what his predecessor Dr Subbarao did not do in this situation. Hiked repo rate. And of course that would be detrimental for our GDP growth in the near term, but then the inflation concerns are growing by the day.
After the hoopla around Dr Rajan of being a rock star central banker, Dr Rajan has bitten the bullet by raising the interest rates in his very first credit policy. But that's the reality and an astute economist like Dr Rajan knows it fully well of the current macro economic situation. Indian markets yesterday rose by maximum in a single trading day in the last 3 years dancing to the tunes of Fed Reserve's non action on tapering. But today, the reality has bitten the investors as the markets have crashed and they will continue to correct in the days ahead.
Going forward, investors must realize that our fundamentals are really weak and RBI does not have a magic wand to reverse the downtrends all alone. Government has pitch in with fiscal measures to bring back confidence levels back in the economy. On the global front Fed tapering is a question of when and not why, as sooner than later Fed might start the tapering which will adverse impact on the Indian markets.
As such, Government and Mr Chidambaram has to "walk all alone" towards the growth path in the current scenario.
Gopalakrishnan V, Founder & CEO, Money Avenues.
