There is an adage in financial markets that when the stock market and bond market give conflicting signals, always trust the bond market. Till a few days back, Indian equities appeared to be immune to the upheavals in the money market caused by the RBI’s frantic measures to defend the rupee. But the 554-point slide in the Sensex in the last three sessions is a clearly indication that rupee and interest rates are worrying global investors in Indian equity. And the signal from the bond market right now is that there is very little chance of the RBI cutting benchmark rates at its monetary policy review on Tuesday. Never mind the Finance Minister’s recent remark that RBI’s recent decision to reduce money flow in the system did not signal a shift in RBI’s stance towards higher interest rates. For the RBI to cut rates now would mean contradicting itself.
The steps taken by the RBI to shore up the rupee are similar to the ones it had resorted to during the Asian crisis of 1997 and in 1998 when the US imposed sanctions on India following the nuclear tests. But will they be effective?
"The uncertainty lies in enhanced global linkages for the Indian economy (vs in 1998). Particularly due to the short-term nature of recent flows, any crisis globally can take the rupee down another notch, and prolong the RBI`s tightening. Moreover, the unintended consequences of tightening are not clear yet," says a note by brokerage house Credit Suisse.
The unanimous view is that the rupee will not stabilise unless there is a meaningful reduction in trade deficit (exports minus imports). Some economists like Indranil Sen Gupta argue that the RBI needs to buy forex and increase its import cover (measured as the number of months of imports foreign reserves could pay for) for the rupee to be stabilise.
And there is no good news coming in from the equity market either, even if benchmark indices do not show signs of much damage. Fact is, the main indices are not reflecting the battering that mid and small caps have been subject to.
Also, investors have been paying exorbitant valuations for a handful of stocks, notably FMCGs, citing better rate of earnings growth relative to the rest of the market. But even that theory could be tested, with stocks like ITC and HUL reporting disappointing quarterly numbers.
In short there seems to be no place to hide.
What do you think? Will the market surprise on the upside?
There is no logic or formula applied to this market. Buzz is very loud and clear, until the 2014 election results the markets is anyone`s guess. So my friend do not break your head on technicals, it may not give correct signals. This is my perception, no offense pls.
It was in 2007-2008 that sub prime mortgages acted as the trigger of economic maladies in US. We saw collapses of giant US financial corporations.At this time BRICS and later PIIGS was the hot theme. India was projected as the financial superpower of 2050 followed by China. Developed nations were to be left way behind. Contagion spread all over the west .US started printing dollars followed by QE1 , QE2 and so on. Apparently out of panic RBI started increasing interest rates .This led to inflation ,growth slowed , INR nosedived and current account deficit ballooned. Surprisingly US stocks saw fresh bulls and India is seeing all bears..For the moment let us forget GDP , CAD et al . The basics of economics should over ride all other manipulations in the longer run and that is if meals are not available below Rs.50.00 WHY SHOULD OWNERSHIP OF COMPANY (shares) BE AT THE LOWEST LOW ? For ages shares have acted as a hedge for inflation. I believe this is our life time opportunity to accumulate fundamentally sound and investor friendly mid and small companies. Whenever the market surprises us on the upside , sooner or later , we will reap benefits.