The taper is down another USD 10 billion and the Federal Reserve is talking of hiking interest rates. In a scenario like this, it will now depend on how pragmatically the RBI handles the entire situation and helps soothe nerves in order that the market maintains its upward traction. For today, it looks like the benchmarks are all set to see some downward pressure to start with and trade with a negative bias for the rest of the day. Take a day at a time and book profits wherever possible.
Before you realize it, the flow of FII money which seemed like a trickle turning into a flood only a few days ago will probably reverse its course. The result will be a change in the mood and hence the course of the markets. The trigger lies in the Federal Reserve’s intent of hiking interest rates within as soon as six months from the end of the taper. Janet Yellen spoke at length at yesterday’s FOMC meet, but only a few words made sense in the context of the markets. The intent of the Federal Reserve to go on and hike interest rates within six months from the end of the taper has been spelt out loud and clear. This should trigger a fresh flight to safety for the dollar thereby impacting markets the world over.
The first signs of this were visible in the way the US markets themselves behaved yesterday. The S&P 500 was down more than half a percent or 11.48 points, while the Dow Jones Industrial Average declined 114.02 points (0.70%) to 16222.17. Earlier in the day, European stocks too had remained quite volatile in anticipation of the FOMC meet. Markets eventually closed lower feeling the unease of what lied ahead. So overall the Fed set the stage for some global market reversals through its talk of hiking interest rates sooner than was expected.
As for the taper, its down by another USD 10 billion and this will create some more pressure on the liquidity that was so far flooding the markets. Considering all this the markets opening down today and trading in a decisively negative zone should not come as a surprise. Early indications are already in place the way Asian peer markets are behaving so far. Except for China, where the Shanghai Composite is trading a quarter percent up, all other global benchmarks are deep in the red with an average decline of nearly a percent. The Japanese Nikkei and the Hang Seng in Hong Kong are trading 0.70% below their yesterday’s close. Indonesia, Taiwan and Korea are facing a lot of selling pressure, while Malaysia and Singapore are just beginning to show signs of cracking.
Meanwhile, a report by HSBC is pegging high hopes on the future of the Indian economy. According to it, the Indian economy looks very promising despite the recent slowdown in growth. it banks heavily on the growing population and the nascent middle-class to drive future growth. Better growth prospects of India’s trading partners like the US and the UAE are expected to help bolster export demand for consumer goods and hence deliver better economic growth going forward for India says the report. There is little hope that the markets could ignore the cacophony of the reduced bond buying by the Fed and its intent of hiking interest rates and focus on reports like these at least for now. After all, we have heard these rosy words about the growth prospects of the Indian economy, numerous times earlier too.
In order to stabilize and keep the markets calm in the wake of these new developments on the western shores, the RBI would have to act in a level headed manner and boost the confidence of the marekts. Slated to meet on the 1st of April, Dr Rajan and his team have a task already cut out for themselves. But the indications coming out of their actions are raising some doubt on the way ahead. Talks of easing out import restrictions on gold seem to be a bit premature at this stage.
The RBI in doing so would only be unleashing a wild boar which has been chained by it after great amount of difficulty. Doing away with import restrictions of gold at this moment will only act as a double whammy on an already fragile sentiment on the Indian currency. Demand for dollars needs to be checked in order to avoid the Fed’s language from damaging us badly.
It will now depend on how pragmatically the RBI handles the entire situation and helps soothe nerves in order that the market maintains its upward traction. For today, it looks like the benchmarks are all set to see some downward pressure to start with and trade with a negative bias for the rest of the day. Take a day at a time and book profits wherever possible.
