The Indian markets are expected to open on a flat to negative note and trade volatile at least until the first half of the day. The rate hike has already been discounted over the past week or so. The only thing that will matter today and make a difference to the markets will be those vital 25 basis points which fall between absolute consensus of a 25 basis point hike and the very pessimistic expectations of a 50 basis point hike. Hope is the only succor today.
The RBI board meets today for the mid-quarter review of monetary policy. This is ‘the point in time’ that markets have been anxiously waiting for over a week now. The conclusions of the meet are almost foregone. Interest rates are expected to go up. The RBI governor has been very vocal about his concern for higher inflation. That has remained the cornerstone of his monetary policies so far, ever since he took charge. In the days preceding the policy meet, he has been very categorical about the priorities of the central bank. Control inflation first and work towards growth only once that falls in place. This makes it a no brainer about what could be in store today.
Consensus has it that the Governor may resort to a 25 basis point hike in interest rates. However, there is a gut feel that the rate hike may be even higher. A 50 basis point hike in interest rates should not be surprising considering that, Dr Rajan is man who could go all out to accomplish what he has decided to. Though desirable, a higher hike in rates could be detrimental.
The undesirable impact of higher rates has been there for all to see. India Inc has been reeling under pressure for quite some time. The banking sector has been the most adversely affected, having come to a stage where it looks to be the biggest worry from the economy point of view; bad loans are on the rise and new off take of loans has been almost negligible so to say.
On the flip side, it would be better to swallow the proverbial bitter pill now, than to suffer acutely going forward. You could argue in favour of this and readily agree to the correctness of the rate hikes that are likely to come in today (and probably even in future until Inflation falls back to some level which is considered to be a comfort zone of the RBI). What needs to be questioned is the veracity of the argument that rate hikes are the only way of curbing inflation. If that were so, the many rate hikes that have happened in the past one odd year or more should have helped in curbing it to comfortable levels. For sure, this hasn’t happened and hence this day comes with worries of another rate hike to deal with.
Globally factors too are not in favour of a worriless close to the year for the Indian markets. The noise about the commencement of taper is getting louder and louder in the US. Global markets have been on their toes especially over the past couple of days following a strong set of US economic data. The sucking out of liquidity is the biggest worry that comes with the taper. The Fed meets today and could talk about this. Cautious investors have been staying on the sidelines waiting for clarity to emerge on this front. European markets weakened yesterday after a good rally over the past week. In the US too, suffered the same fate. After a struggle to stay above previous closing levels, benchmark indices gave in to close on the lower side by the end of the day.
Asian markets are trading mixed after opening in a very anticipatory mood ahead of the US Fed meet. Japan continues to lead the way with the Nikkei trading up by 1.25% as of now. Korea, Indonesia and Hong Kong are the only three other markets which are presently holding up their head. The Seoul Composite is trading up a quarter percent, while the Jakarta Composite is trading up by a slightly higher 0.40%. The Hang Seng is just about trading in the positive. China, Malaysia, Singapore and Taiwan are facing selling pressures today. The Straits Times and the Shanghai Composite are trading an average quarter percent below their yesterday’s close, while the Taiwan Weighted and the KLSE Composite are down an average 0.10%.
The Indian markets too are expected to open on a flat to negative note and trade volatile at least until the first half of the day. The markets have already discounted the expected rate hike over the past week or so. In fact, yesterday they surprised us initially, but eventually did what was expected. They opened higher on global cues and some amount of short covering but closed weaker amid volatile trades as was expected. This was the sixth straight day of a negative close for the markets. Indeed the euphoria over the assembly election results have completely waned out at least for now. The only thing that will matter today and make a difference to the markets will be those vital 0.25% which fall between absolute consensus and the very pessimistic expectations. Hope is the only succor today.