A Positive Start Today. Time To Absorb The RBI Fine Print

We said, expect the unexpected. So we did and so it happened. But instead of a status quo or a rate cut, the governor actually went ahead and in a stunning move hiked interest rates. After a kneejerk reaction, the markets regained composure to close the day on what best can be described as a flat note. Not because the quantum of the rate hike wasn’t all that much to warrant worries, but because of the assurance that followed about no more rate hikes at least for now.

The interest rate cycle is being perceived to have peaked out as of now. That was precisely reason enough for the markets to come back from the dumps last evening. The impact of the hike in interest rates put into effect yesterday will be known only with a lag of time. But what comes out best from the RBIs third quarter monetary policy review is the sincerity and approach of Dr Rajan and the team working under him.

There has been no hint of complacency in handling the monetary policy and working in a populist style despite there being room for it. This has an obvious reference to the decline in food prices which have brought down headline inflation. A lower inflation number could have been taken on face value and interest rates brought down at least in the penultimate quarter in a bid to fuel economic growth. That would have served a dual purpose. One, it would have helped the markets prop up from the uncertain environment that it currently is facing. And two, which again is a derivative of the probable economic growth, is it would have helped the incumbent government to cook some fresh broth on the growth front to serve the electorate.

On the contrary, the Governor has been quite categorical in placing on record his fears about the economy not being able to do much on the growth front in the fourth quarter after a not so impressive show in the third quarter. Consumer Price Inflation has achieved centre stage. According to the RBI ‘it is only by bringing down inflation to a low and stable level that monetary policy can contribute to reviving consumption and investment in a sustainable way. The so-called trade-off between inflation and growth is a false trade-off in the long run’.

Necessary measures have been initiated in the direction of bringing down inflation down to acceptable levels and if these start yielding result sooner than expected, it will certainly offer the central banker a leverage to bring down rates. The whole theory about bringing down interest rates in a bid to spur growth or vice-versa seems like a chicken and egg situation. But growth is not just a factor of interest rates. The factors contributing to growth are sometimes invisible by their very economic nature. This is being currently felt in the western world as well. Dr Rajan’s assessment has to be trusted for now. He seems to be a person who somehow catches the right pulse on the economic front.

Talking of economic growth, it is the only factor that will eventually help markets come out of uncertainty and scale new heights. For now it is happening in the UK and will soon spread over other parts of the Europe. Markets in this region rose yesterday breaking a three day losing streak. UK’s economy grew at its strongest pace last year since 2007, with gross domestic product rising 1.9%. However, the fourth quarter growth slowed down to 0.7% from 0.8% in the previous quarter, which was in line with analyst expectations.

US markets too closed higher yesterday rebounding from the lows they hit following a consistently losing streak over much of last week. Corporate results continued to be the guiding force for them. Today should be a highly anxious day for the markets there. The Fed meet will be the principal factor to drive markets there. Fears of a further taper are already spooking markets globally. Whether these will turn into reality will be known shortly.

Asian markets have opened positive and trading positive today. Except for Singapore and Taiwan all others are well in the green. The Taiwan Weighted is down 1.58% while the Straits Times is trading weaker by 0.32% as of now. The Japanese Nikkei seems to have recovered well and is currently trading 1.79% up from its yesterday’s close while the Shanghai Composite is up a quarter percent. Hong Kong, Indonesia, Malaysia and Korea are up an average 1% and are looking in strong at least for now. The SGX Nifty is currently trading up 13 points indicating a positive sentiment on the Indian markets for today.

Following a benign reaction to the monetary policy review, Indian markets are expected to open on a positive note this morning. We are almost at the end of the result season and the anxiety over the monetary policy is done with. There is of course still some to come in the form of the US Fed’s decision on tapering that will happen over the next couple of days. That coupled with the F&O expiry shall keep markets volatile through the remainder of this week.  As for today, expect a flat to positive open and a range bound trade to close the day.