The Week Ends In Red

The Indian markets witnessed some real sell off in this week. Both the benchmark indices Sensex and the Nifty ended the week losing around 3% each. Let us look at the reasons that have played its part in this connection.

The first and the foremost is the surprise move by the RBI on Tuesday, February 28, 2014 to increase the repo rate by 25 basis points from 7.75% to 8%. According to the polls conducted by various media, most of the economists were expecting a status quo on repo rate.

The reasons why street was expecting a status quo was softening of both consumer price index (CPI) inflation as well as wholesale price index (WPI) last month, while the growth measured by Index of Industrial Production (IIP) contracted. RBI, however, has different view according to Dr. Rajan "Although headline inflation has fallen significantly with the substantial fall in vegetable prices, CPI inflation excluding food and fuel has remained flat and WPI inflation excluding food and fuel has risen." and therefore rate hike is in line with indications given earlier by RBI.

After a surprise act of RBI to hike the repo rates by 25 basis points, no one had guts to take a bold step and take any new exposure to the equities. Further it is the expiry for the January contract on January 30, 2014 (Last Thursday of the month), it was another reason why everyone was in a cautious mood.

The Fed statement is out and in its last meeting as its Chairman Ben Bernanke has cut the pace of bond buying for a second straight meeting, uniting behind a strategy of gradual withdrawal from Ben S. Bernanke's unprecedented easing policy as Janet Yellen prepares to succeed him as chairman.

The Federal Open Market Committee (FOMC) in its statement said it will trim monthly purchases by USD 10 billion to USD 65 billion, citing labour-market indicators that were mixed but on balance showed further improvement and economic growth that has picked up in recent quarters. Noticeable factor is, it was the first meeting without a dissent since June 2011, showing the tapering strategy has brought together policy makers.

The FIIs this week remained sellers for the first time in 2014 selling of equities worth Rs 2081 crore. The DIIs too remained seller for the week. Going forward, the markets are likely to trade on a volatile note in absence of any major trigger expect for the quarterly results.