The Fed Holds The Key

The markets are forever looking out for triggers and there is always something or the other which will keep them on the move. After all, that is the basic character of the equity markets worldwide and more particularly of those in emerging economies like ours. After a rather mediocre results season all hopes were on what the RBI would do at its mid-quarter monetary policy review. Despite clear indications emerging from certain quarters of why the RBI would not budge on the interest rate front, expectations were being built in that direction. These expectations weren’t without reason. Lowering inflationary pressures were the main trigger for their buildup. When the time came, factors weighing against a rate cut only got stronger, eventually resulting in the RBI maintaining a status quo on the rate front.

A rapidly declining rupee resulting in a widening Current Account Deficit was the main factor that led the RBIs action yesterday. Well, love of gold seems to be hurting the economy more today than it ever did. Overall, exports contracted for the first time in four months which has pushed up the trade deficit to the highest level in seven months. The markets however, seem to have reacted appropriately to all this changing course quickly after a rather mute start to the day yesterday. Closing at the day’s high is something that builds a slight amount of confidence on the fact that RBIs action would have been priced in by now.

So, what next? Everybody including the RBI governor himself now seems to be looking for triggers outside of the domestic ecosystem. All eyes are now set on the Federal Reserves’ meeting to be held tomorrow. Will there be any announcement of a cut in the bond buying levels of the Fed? Well, speculation is useless and expectations seldom come true in wobbly economic situations like the ones we are currently in. Indications from markets abroad however point toward the Fed too maintaining a status quo on its monetary policy. European markets rose ahead of the Fed Reserve meeting expecting no change in the bond buying programme.

US stocks too followed the same pattern, beginning the week on a positive note. The timing of the Federal Reserves’ decision to taper off the fiscal stimulus programme through bond buying holds the key to further market moves. Speculation on that front is keeping the markets on its toes and will likely be a major trigger at least for some time to come.

Near home, Asian markets too seem to be going through the anxiety of waiting for the Fed to announce something more sober and well meant for the markets. It looks to be a rather mixed open to the day with Japan, Malaysia, Hong Kong, Korea and Taiwan trading negative. China is mildly positive while Indonesia and Singapore have opened well in the green and are holding up to their gains.

Looking at the overall environment on the domestic front and taking cues from global markets, equities today seem to be headed for a rather indecisive trading session. In fact nothing much can be expected from the markets over the next week or so. The slide of the Rupee has to be arrested soon in order to avoid any major damage. Ways and means of curtailing the CAD seem to be elusive at least for now. All this will continue to exert a downward pressure on the markets in the short to medium term. Add to this the political climate which continues to be getting more and more murkier and you certainly have a gloomy market scenario panning out in front of you at least over the short to medium term. What about the longer term prospects? Well let me leave you with what Mark Mobius, executive chairman, Templeton Emerging Market Group has been heard telling frontline media. According to him, fund flows from overseas investors into emerging markets such as India will remain strong even if the US Fed reduces the bond buying that it has been doing. Global banks with surplus funds will chase growth, says he. Should the market read too between these lines, you know where it could open and what a day it could be!