Nothing To Worry, But Nothing To Cheer Either

The problem with a market that lacks enough triggers is that, it can change course for good or bad at any point in time. Yesterday’s market is a case in point. After an insipid and negative start following global cues and remaining that way for most part of the day, it suddenly changed course towards the end to close in the green. Good for all. Over the next two days from now it could well be the same story as there is nothing new to be talked about or even worry.

Hopes of a rate cut over the remainder of the financial year have been crushed by the Dr Urjit Patel committee of the RBI. This committee set up to review the monetary policy, is of the view that inflation is likely to remain at higher levels at least for another year or so. The committee has proposed making consumer price inflation the main anchor for setting the monetary policy by replacing the presently used headline inflation. This definitely seems to be a good move. After all the end-user prices are the main determinants of demand in an economy.

However, to repeat what has been said here on a number of occasions, consumer prices today aren’t merely a factor of demand and supply. The evolution of the financial system and the birth of esoteric products like derivatives has given birth to an altogether new phenomenon which is the principal determinant of prices – speculation.  Repeated attempts at trying to curtail demand via interest rates have failed in the past. They will not work in the future either.

Even if you assume that they do, the recent coming off of prices at the consumer level has certainly given the RBI a good chance of working towards bringing down interest rates. Dr Patel has probably quelled the expectations that were getting built around this premise. But Dr Rajan has that unique knack of taking a 360 degree view of the matter on hand and acting accordingly. That keeps the possibility of a rate cut, probably even a very small one alive in our minds.

While that is a full week away from where we are today, the Finance Minister has been hard selling India for its growth prospects to the international community at the World Economic Forum in Davos. It certainly looks like getting the right kind of response. Leaders across the globe, gathered at the forum have been reposing their faith in the Indian growth story. India, according to many remains a good place to do business with strong fundamentals.

These voices include some very prominent ones including that of Thomas Friedman, the globally known economist. His views, of course came in with a caveat about the ‘big challenges’ that the India faces. Well to get over the challenges and seek a meaningful growth path will now be the principal responsibility of the executive body that comes to power in the general elections. The road seems murky but the future bright.

Meanwhile, for now, western markets continued to seek direction in the corporate performance for the December quarter that is unfolding. In between a better than expected jobs data in the UK has triggered a debate on the possibility of a rate hike there. Though the UK markets remained under pressure following this piece of data, other European markets traded positive yesterday. US markets too traded flat with a slightly positive bias to close in the green.

Asian markets are trading weak this morning. Except for Japan and Indonesia, all others are in the red. A weaker than expected Chinese manufacturing PMI seems to be pressing the markets on the down side. Expected to come in at 50.6 against the previous 50.5 it actually read 49.6, which is pretty disappointing. The Shanghai Composite is down 0.32% as of now, while Taiwan is trading 0.15% below its yesterday’s close. Hong Kong seems to be hit badly with the Hang Seng trading more than a percent below its previous close. Malaysia, Singapore and Korea too are following their peers to trade between 0.20% and 0.70% below their previous close levels.

With global cues not looking very impressive, the morning could once again turn out to be rather flat with a negative trading bias to continue for today. We could see a slightly negative open with the markets trying to seek direction from anything worthwhile that comes its way as the day progresses. The week could end rather tepidly in anxiety over the RBIs meet to be held next week. Let’s continue with our caution of not being too optimistic and rushing in to take big bets unless there is more clarity on the policy front.