IS RBI Next Move CRR Hike?

Repo Rate hike, has come at the most inappropriate time. Some observers were unperturbed as the hike was only marginal – 25 bps – and the market had foreseen this as coming. But, I feel, investors would take it negatively as there is no certainty that there would be no further monetary tightening. From whatever economic data we are getting, it is becoming clear there would be more monetary plugging to tame inflation.

RBI has surprised the market in the past. And, this makes it difficult to take a call on whether the next move would come in the form of a CRR hike or Repo Rate hike. In a nutshell, looking at the current scenario, the prospects are not very encouraging – at least in the near term.

RBI always likes to surprise

The Reserve Bank of India (RBI) has lent another blow by increasing the Repo Rate by 25 basis points (bps).

This will lead to further increase the interest rate which, in turn, will accentuate the industrial slump, more markedly in certain loan-dependent sectors like realty and automobile.

RBI traditionally likes to surprise, particularly with the timing of its rate changes, and the latest move is no exception. I thought it would tighten its policy this month, and it will perhaps link it with a particular growth or inflation release. But the hike in the Repo Rate has taken the market by a bit of surprise as it was anticipating an increase in the cash reserve ratio (CRR).

Indian Stock Market in Unenviable Position

The Indian stock market finds itself in an unenviable position, where nothing is going right – be it the heavy FII offloading, mounting oil prices, creeping inflation or the unmistakable signs of a growth slump.

As a result, the sensitive index is responding to every bit of unwelcome news, leaving investors and market watchers in a fix on when this uncertain phase would end and indices would resume a rational and a more predictable course. The groping market has sunk so much of late that it is now among the worst performers within the brackets of emerging markets.

Is optimism returning to Dalal Street?

Is optimism returning to Dalal Street? Last week the market had managed to remain in a positive territory. The Sensex witnessed a continuous upward movement for six trading sessions despite the fact that RBI had hiked the CRR by 50 basis points. So what does it indicate? Confidence among investors on the rise?

Though not very significant, people on the street sound more upbeat and the level of optimism is building up. However, sentiments remain cautious ahead of key results and RBI meeting on monetary policy.

Overall the feeling in the market is that the May series of futures may not be as bad and in the near-term we may witness a slightly higher level. The rollover of around 62 per cent suggests that there is a great deal of optimism in the market. Although this is comparatively lower than the average of last year when we witnessed a good rally. But it is much better than the 52 per cent rollover we had in the last month.

Will Market Sustain the Rally, After Good Past Week?

I think in the short term there are three things which will guide the market.

1. First, the inflation numbers and the monetary policy. One should now be prepared to face some monitory tightening. Although it was not on the cards two months ago, many analysts have discounted the same at present. Though RBI ups CRR by 50 BPS, but there is no consensus on market trading negatively due to CRR hike. Vallabh Bhansali, Chairman, Enam Financial Consultants, said the markets were not completely unaware of this. "It did not come as a complete shock. The hike was being mentioned in many circles, but the market will not like it all the same. The markets reaction to the CRR hike would be muted. The banks had a good run up in the last few sessions and this is a bit of a dampener. I see this as a continuous hawkish stance as it has come in between the policy. I am concerned about the force of inflation and the force with which the government and Reserve bank of India will both come down on it, so I would be cautious about the future." Therefore, I think that anything apart from a CRR hike may impact the market negatively.

2. Second, the actual earnings figures going ahead; so far we have not yet seen any disappointing figures.

3. Third, the monsoon forecast. The India Meteorological Department has stated that the rainfall all over the country would be 99 per cent of the long period average. This will not only help the market to revive its sentiments but will also help the government since a major chunk of the inflation has roots in the perceived shortage of farm output.

Overall, any bad news is not expected at least from the domestic front and this should keep the market in a positive territory. And if things are well-placed in the global markets too, the recent upward movement in the market may carry its momentum in the coming week too.

Closing Bell

Frontline stocks pared away gains but closed slightly higher Wednesday as investors booked profits ahead of inflation data to be released tomorrow.

Counters in BSE IT index continued upward journey while BSE Capital Goods Index stocks ended in the red.

Tier II and III stocks outperformed the benchmarks. BSE Midcap Index ended 1.43 per ent higher at 6699.10 and BSE Smallcap Index advanced 1.79 per cent to 8,351.

Bombay Stock Exchange's Sensex ended 0.56 per cent or 90.53 points higher at 16,244.19. The index swung between a range of 16,413.80 and 16,198.56.

National Stock Exchange's Nifty closed at 4888.80, up 0.19 per cent or 9 points. The index touched an intra-day high of 4951.40 and low of 4874.05.

Biggest Sensex gainers were Infosys Technologies (up 5.83%), Wipro (5.75%), Reliance Energy (3.87%), Hindalco Industries (1.87%), Reliance Industries (1.46%), Reliance Communications (1.33%) and ICICI Bank (1.1%).

BHEL (down 3.28%), Ambuja Cements (3.26%), Jaiprakash Associates (2.49%), NTPC (2.12%), Tata Motors (2.08%), Hindustan Unilever (1.77%) and Bharti Airtel (1.55%) were under pressure.

Market breadth showed 1866 advances and 813 declines on BSE.


Source: economictimes.com

India disproves Friedman on inflation

Inflation in India and other developing countries is not a monetary phenomenon and cannot be curbed by monetary policy.
For Complete Article Click Here