Rajan And Bernanke Provide A Christmas Gift- Expect Indices To Dazzle

In stock markets always expect the un-expected. And the way Dr. Rajan and Ben Bernanke, the two important people at the helm of central banks in India and US have announced the policies, clearly indicates the same. While against the expectations of everyone on the street Dr. Rajan maintained a status quo on the repo rate front, Bernanake also announced the early start of the taper by around USD 10 billion from the next month. Both the policy announcements were important for Indian equity markets as well as the global equity markets. As the policies are announced, what will be the impact of the same on the Indian equity markets? Let’s decode the same.

On the domestic front, with the headline inflation remaining above the tolerance levels everyone on the street expected a rate hike by at least 25 basis points. Few of the analysts even expected around 50 basis points rate hike. However the Governor had something else on his mind. In a surprise move RBI kept the Repo rates unchanged. While this came as a surprise for others, we were hardly surprised. In one of our publication we had categorically stated that we expect a status quo on the policy front as the governor may wait for some data points on the global as well as the domestic front. With the RBI announcing the status quo on the rate front, the investor fraternity was quick to reckon the same as the leading equity indices spurting to new orbit.  

Now thought the Indices spurted all eyes were on the US FOMC, as the major announcement on the QE taper front was expected. Expected start of the taper was a major factor which had spooked the markets many times in the recent past. And hence the alacrity on the same was needed. And yesterday, Bernanke finally announced the start of the taper by reducing the bond buying program by USD 10 billion to USD 75 billion per month. He announced that “Reflecting cumulative progress and an improved outlook for the job market, the committee decided today to modestly reduce the monthly pace at which it is adding to the longer-term securities on its balance sheet”. The Fed has been buying $40 billion worth of mortgage-backed securities and USD 45 billion in Treasury bonds every month. It will reduce purchases of each by USD 5 billion. He however kept the interest rates at Zero. This clearly suggested that Fed has enough confidence in the U.S. labor market to taper asset purchases while still promising to hold interest rates close to zero.

So there are many positive takeaways here. First and the foremost is the confidence of US Fed about the possible recovery in the US. Secondly the quantum of taper has been lower than the street estimates. While it was estimated to be at USD 15 billion, Bernanke announced by reducing it by USD 10 billion.

No wonder the markets responded positively to the developments with Dow witnessing an up-move of 1.81% and even NASDAQ gaining 1.14% closing at record high levels. Impact of the same was also visible on the Asian markets with Nikkei touching a Seven Month high level as the Index is trading with gains of more than 1.56%. Similar is the case with the other Indices with Shanghai Composite and Hang Seng also witnessing significant gains.

As for the Indian equities the SGX Nifty is trading in positive zone with gains of more than 47 points (up 0.70%). In a nut shell even the Indian markets are not likely to be an exception and hence expect a gap up opening for the markets. Indices would add to the yesterday gains.