Pre- market: Central banks to keep D-St on edge

The outcome of RBI's and US Fed's policy meets and the direction of emerging market currencies will drive sentiment this week

The broader expectations are RBI would opt for status quo on policy rates, while optimists have been betting on a small rate cut on Tuesday's rate-setting meeting

Stock investors and traders will have enough on their plates to keep them busy in the week ahead. The outcome of the Reserve Bank of India (RBI)'s and the US Federal Reserve's policy review meetings and the direction of emerging market currencies, including the rupee, will drive sentiment this week. This is because volatility could heighten ahead of the expiry of January futures and options contracts.

 

Dalal Street is expected to open weak on Monday if the rupee extends its decline. The currency fell to 62.69 a dollar on Friday from 61.93 the previous day.

The drop was in line with the sell-off in emerging market currencies, hit by slowing growth in China and political problems in Turkey, Argentina and Ukraine. The Sensex fell 1.1 per cent on Friday, after closing at record highs the previous day.

On Tuesday, RBI governor Raghuram Rajan will decide the direction of the stock market. Investors are awaiting the central bank's decision in its rate-setting meeting - whether to keep rates unchanged or to tighten monetary policy. The broader expectations are RBI would opt for status quo on policy rates, while optimists have been betting on a small rate cut. However, Rajan's comment late last week, that inflation was a "destructive disease" forcing the apex bank to keep interest rates high, has poured cold water on such expectation.

V Balasubramanian, vice-president and fund manager, IDBI Mutual Fund, said, "There would be a rally if RBI does not increase rates but that will be short-lived. A lot of it has already been priced in."

After RBI's policy review, investors' focus will shift to the US central bank's two-day Federal Open Market Committee meeting, ending on Wednesday. This will be the last meeting for outgoing chairman Ben Bernanke. Asian and emerging markets, which will get an opportunity to react on Thursday, could weaken if the Fed decides to cut its monetary stimulus further.

Wall Street participants are betting the Fed will decide to bring down the monthly bond buying programme - quantitative easing (QE) - to $65 billion from the current $75 billion. In the December meeting, the US central bank had cut QE to $75 billion from $85 billion, starting January 1.

Peter Newland, senior US economist, Barclays, said in a client note, "We and the majority of other forecasters expect another $10 billion reduction in the pace of asset purchases, evenly divided between Treasuries and MBS (mortgage-backed security). In addition, the forward guidance language used in the policy statement is likely to be unedited, suggesting the policy will remain highly accommodative, well beyond the breach of the 6.5 per cent unemployment threshold."

Brokers said investors would closely watch the foreign institutional flows into India for cues on the impact of a possible QE cut.

At home, various large companies such as Maruti Suzuki, Sesa Sterlite, JSW Steel, ICICI Bank, Hero MotoCorp and Bharti Airtel will announce their third quarter results.