For global equity markets, it has been a choppy September. While the US Federal Reserve (US Fed)/Federal Open Market Committee (FOMC) kept markets guessing on the beginning and the quantum of tapering its $85-billion-a-month bond-buying programme, in the Indian context, Reserve Bank of India (RBI)’s review of the monetary policy, the first under new Governor Raghuram Rajan was keenly watched.
The US Fed’s decision, along with the measures announced by Rajan in the first week of September, helped prop the rupee, which recovered from a low 68.8 on August 28 to 62-levels.
If one goes by how key events are lined up, October promises to be a blockbuster month, with central banks in the US and India reviewing their respective policy decisions on back-to-back days. While the FOMC would meet on October 28 and 29, RBI is set to review its monetary policy on October 29, just two days ahead of the derivatives expiry for the October series. Add to that the nervousness surrounding the second quarter results of India Inc, as well as an announcement on the US debt ceiling.
The road ahead
“Since the December meeting has a press conference, it would be more suitable for the first taper. However, Fed speakers had earlier indicated October should not be ruled out. Nevertheless, we return to our earlier call for a December tapering. This is also based on recent developments regarding the coming budget battles that may delay the re-acceleration of the economy, as investment demand is likely to remain pent up as long as the fiscal policy uncertainty continues,” said Jan Lambregts, managing director and global head of financial markets research, Rabobank International.
In a September 20 note, Siddhartha Sanyal, Rahul Bajoria and Rohit Arora of Barclays suggested given RBI’s preference to manage inflation and inflation expectations, they do not expect any easing in the repo rate in the near term. “The central bank has categorically flagged inflation is higher than its comfort and household financial savings are lower than desirable. Such guidance does not preclude further rises in interest rates,” they said.
“We think the policy bias will be towards further rate rises, rather than cuts until the nominal policy anchor (presently ambiguous) sustainably moderates. We now expect the repo rate to be raised by 50 basis points to eight per cent in FY14, followed by a prolonged pause,” says Sonal Varma, economist at Nomura. “The potential for dollar/rupee to break through recent lows of about 61.7 on spot now looks lower in the near term, given RBI’s inflation focus. However, it is possible RBI could still take more measures to support the rupee, but primarily to bring inflation under control.”
Market outlook and strategy
In such a scenario, what should your investment strategy be?
“Among individual stocks, telecom (Idea Cellular and Reliance Communications) and capital goods stocks (Bhel and Larsen & Toubro) may see positive momentum. The long position built up in these stocks indicates the positive momentum is likely to continue. Tata Motors, Mahindra & Mahindra, ICICI Bank and YES Bank are good bets in the rate-sensitive space,” he adds.
Ankit Agarwal, vice-president and fund manager, Centrum Broking, says, “Corporate results (for the second quarter) are likely to be weak. A part of that is already being reflected in poor corporate tax collections, which are close to single-digit numbers. Therefore, the markets may remain volatile, especially during mid-October, when the results start to trickle in, besides the US debt ceiling issue.”
“Our strategy is to stay put in defensives stocks such as the information technology (IT), pharmaceuticals and FMCG (fast-moving consumer goods) counters. In the IT space, we are bullish on MphasiS, OFSS and CMC. Polaris can also be bought on a correction. Tata Coffee and Britannia are our top picks in the FMCG pack, while we like JB Chemicals in the pharmaceuticals pack,” he adds.