Should You Expect The Unexpected From the RBI?

They call it flight to quality. But one look at global markets yesterday, particularly the Asian markets, will tell you, what we witnessed yesterday, was a crash landing and no mean flight of whatever they are referring to. It was the worst trading day of the year so far and with good reason at that. Worries that were playing dead for quite some time now have suddenly come alive once again. So you have the Fed meeting tomorrow and day after to set its policy, the RBI meeting today to take a look at what India ought to be doing and of course a host of economic data, particularly from the two Asian majors; Japan and China falling short of street expectations.

Primarily the change in sentiment from a buoyant one to that of caution and then gradually to fear is being led by the US Federal Reserve. The probability of it further tapering the bond buying exercise is haunting the markets. This fear isn’t new. We have seen it come and go in the past too. So it all goes from the recovery in the US economy to the Fed deciding to taper its bond buying and hence investors/traders recalling dollars from other markets as the US is likely to offer better returns.

This so called ‘flight to quality’ of the greenback is what has led to a sudden change in the direction of various currencies including India and in turn triggered the fall in the markets. But to put things in perspective, a full blown US recovery is yet a distant dream. Even data the home sales data that has come in yesterday fell well short of expectations. There really seems to be no specific and concrete basis on which talks of the US economy are finding a voice. For now it seems like a hush about taper is a good way for the US to bring its currency back to some respectable level after it gets drubbed internationally.

Markets in the US and Europe tracked Asia closing in the red yesterday. The deep route of the Asian markets seems to hurt sentiment in these regions too. Benchmark indices in the US did in towards the end of the day closing below the centre line while Europe too faced some good amount of selling pressure following the overall week sentiment prevailing in global markets yesterday.

Asian markets are slightly recovering from the carnage this morning. There is mixed trend visible as of now with some trading in the green a few in the red and some on the brinks. Japan has recovered half a percent from its yesterday’s close, while Malaysia, Korea and China are following suit. The Shanghai Composite and the KLSE Composite too are currently trading half a percent up from where they finished yesterday while the Seoul Composite is up a quarter percent as of now.  Taiwan and Indonesia continue to bleed with the Taiwan Weighted trading down 1.58%, while the Jakarta Composite is the worst performer this morning, trading down 2.58% from its previous close.

The RBIs expected policy action will be the real tone setter for the markets over the short to medium term. Last time around the governor seemed to have discounted inflation from his policy talk on the lines that it was on its way down. The impression made out was that it didn’t really matter for rate settings as of now. The sudden u-turn which comes in the report submitted by the committee under the chairmanship of Dr Urjit Patel last week is surely a surprise. Taking cues from there, the market is expecting a status quo.

Looking at the international scenario, and combining it with Dr Rajan’s astute sense of business, there is every possibility that the responsibility of pacifying the markets would have once again fallen onto him. Following this, while 90% of the mind is tilted towards expecting a status quo, the remaining 10% is surely gunning for a rate cut, or at least for benign measures which can help prop up the market sentiment. We aren’t really to away from the decision.

So the day will begin with the highest level of anxiety over what the RBI could do. Carrying forward yesterday’s weak sentiment and the overall gloom in the international markets, you could see a depressed open for the markets today. A short pull back from lower levels is what could happen in the first hour and a half of trading and the RBIs decisions could later shape the course of the market. Expecting the unexpected always pays off.