With the Reserve Bank of India’s (RBI’s) policy review coinciding with the outcome of elections in Greece, Monday was an important day, not only for world markets, but also for India. The positive outcome of Greek elections failed to cheer the markets, as the central bank refused to cut rates despite immense pressure.
With little happening on reforms, sheer optimism had driven equity markets all through June. Every time a disastrous item of data comes out, the markets edge up in the hope that it would possibly be the last straw on the proverbial camel’s back and trigger some action from the government. Despite the abysmal fourth quarter gross domestic product data, both the Sensex and the Nifty moved up five per cent, as a repo rate cut seemed inevitable. Last week, when the Nifty broke past its 200-day moving average, strategists were betting on the market sustaining most of its gains. The bond markets joined in, too, as a rate cut seemed inevitable after the flat industrial production growth figures and steady core inflation numbers.
Given that financial markets had rallied so much in anticipation, some of these gains had to be shed even though global cues were positive. The Sensex shed 244 points to close at 16,706 on Monday. The 10-year government security closed 11 basis points higher at 8.14 per cent. Even though it became apparent by noon that Greece wasn’t breaking away from the European Union, it failed to cheer investors. Rate strategists believe bond rates may settle around 8.20-8.35 per cent.
So, what’s in store for financial markets in the wake of RBI’s decision on rate cuts? Though no rate cut is a dampener for markets in the short term, most strategists believe it is a positive move and will prevent inflation from rising further. Any move to cut rates at this point would have fed consumption growth ahead of investment growth, explains Varathrajan Sivasankaran, head of research at ICICI Securities. The markets will continue to “muddle along,” he believes, as there are a number of factors that will have a bearing on its direction.
In the near term, what could possibly drive the markets is another round of quantitative easing by the US Federal Reserve, as Operation Twist comes to an end in June. Given that growth is faltering in the US, the Federal Reserve is expected to announce some form of easing. However, Dhananjay Sinha, strategist at Emkay Global, believes such market rallies will become shorter in time, as at the end of the day what matters is actual growth. “I won’t be surprised if markets come to completely ignore such liquidity infusions in time, as they do nothing for growth.” Strategists believe only a move to either cut fiscal deficit or push through reforms can sustain a long-term rally in Indian equities.