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.
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