This Is Not The End Of Volatility

The Indian markets fell for the fifth consecutive session yesterday. The RBI left key rates unchanged, which largely disappointed the markets. It had also recently announced several monetary tightening measures to increase the demand of the rupee. It said these measures would be rolled back gradually, but subject to market stability. The RBI also revised the domestic GDP growth projection for FY14 to 5.5% from 5.7%.

Post the monetary policy review meeting, the rupee saw substantial depreciation, adding further pressure on the markets. It breached the 60 to the dollar mark and ended the day at 60.47 per dollar. This created tremendous pressure on oil & gas stocks and further weighed on the markets. As we said, there was directionless trading before the RBI announcement. Post the announcement, the markets gripped on a downward trend and stuck to it through the day.

Clearly, the markets are disappointed and capital outflows are continuing. Moreover, tightening measures have been rather rough on the markets. A short-term downward trend on the Indian markets is evident. It is important to note that the Indian markets are also highly vulnerable to the US markets. Talks of the drawing back of Quantitative Easing have led to a massive shift in the placement of foreign funds. These external factors have been largely responsible for the appreciation in the dollar and hence the depreciation in the rupee.

With domestic pressures of CAD and foreign fund flow persistent, external monetary policies only add to the gravity of the situation and strengthen the likelihood of a short-term downward trend on the Indian markets. On account of the sensitivity of the Indian markets to the moves of the Federal Reserve, it is also likely that the Indian markets will see volatility ahead of the Fed announcement.

The Federal Reserve has begun its two day monetary policy meeting. Global markets will make their move depending on the Fed’s stance on the future of monetary easing.

On the data front, consumer confidence dropped in the US and home prices continued to accelerate. In Japan, retail sales expanded, but at a rate that was slower than expected. In Europe, consumer confidence rose in Germany and Spain’s GDP contracted by a mere 0.1%, indicating that the nation may be close to turning a corner.

Overall, global macroeconomic data was mixed, the domestic mood is low and global markets are jittery ahead of key central bank meetings. In this background, it is tough for one to expect positive movement on the Indian markets today. We expect the markets to continue their downfall.