Thursday, May 2, 2013

RBI can disappoint, strong global cues can shield downside


It is going to be an interesting Friday with pulls and pressures likely. However, today's weekly closing could be very crucial in determining whether the Nifty can continue its spectacular run that it has had over the last ten days.

First, we will have to figure out whether the market should be reacting to the macroeconomic report or not. So, it is not like the RBI was making a policy speech. So we should not confuse the two. It seems quite clear that the RBI is not going to oblige with 50 bps, which is what the stock market is playing for. If that is the case then we are setting ourselves up for disappointment. The problem is that we have had such a big rally. I do not know whether this entire rally is leading up to the expectation of a rate cut.

There are many ingredients to this, notably global commodity prices and the way they have moved. So, to say that the 9 percent rally that the Nifty has had over the last 10-11 days and the 11 percent rally that the Bank Nifty has had in that time is just because of expectation of a 50 bps cut today. I do not think that is the case, but if a large part of that is predicated on a big surprise from the RBI then the stock market should start to get a little nervous and even cautious this morning.

The way the wind is blowing it seems unlikely that the RBI will deliver as much as the stock market wants. If it goes onto deliver 50 bps on the back of what the macroeconomic report said yesterday then there is a credibility crisis. Then the RBI is playing games with the market. Around 24 hours back it tells you very limited room, extremely hawkish language and then 24 hours later it delivers a surprising rate cut.

Even if the market does not get all that it wants from this policy it is quite possible that the downsides could be protective because of the strong global cues that we have going for us. That is particularly because flows have started picking up quite substantially. So Rs 1,400 crore yesterday in the cash market quite a bit of Nifty futures longs. It is difficult to call how the market will receive a not great policy today as you say correctly flows are strong.

India has come back on the radar of a lot of global investors because of the way commodity prices have moved. Also the way the rupee has moved off late, by staying above 54 mark. The current account deficit, which was India's big problem for a large number of global investors have probably seen as being addressed. Therefore people are looking at India in a slightly better light. If that continues despite some policy disappointment, the scenario that you are describing can play out. We might have a reaction, but may not go back to 5,700 kinds of levels immediately which is the bear case scenario.

The global cues need to be kept in mind as there is extraordinary momentum in global markets. Central bankers are doing all they can to keep this asset story going as you heard from the ECB yesterday. So, in that context, whether it is ample liquidity, Central Banks are playing the game. It is possible that the market stretches higher, led by some good strong global cues despite a policy disappointment. However, we take one step at a time because we do not know what the RBI is going to say today. Let us hear the governor out and then we will be in a better position to discuss whether the near-term direction is still up.

Approaching to the Nifty is a bit confusing this morning. There is a news event ahead of us. It is probably going to be a non-event. If we just look back into the history of monetary policies, we drum it up to be this make or break for the market and the RBI quietly slips in a 25 bps with some cautious language and life carries on.

Generally the policy is forgotten even before the end of the trading session. There is nothing despite all the media attention around it to suggest that this time will be any different. We will probably get the 25 bps. The bigger question is whether something more powerful is playing out in global markets, because it is appearing that in the near-term strong winds of risk on that has started blowing once again. Maybe I speak too soon, but if you look at how markets have been moving in the face of economic data it reminds you of those scenarios where the market is focused on central bank action and not so much what the economic tidings are.

If you look at the US of late the economic data has been quite lacklustre, markets have moved higher. China, the data has been unexceptionally weak, markets are up 1.5 percent this morning. Europe is doing well over the last couple of days, despite things being quite weak with the exception that the European Central Bank (ECB) has cut rates. So, it is one of those scenarios where people are saying do not fight the central banks. Lot of liquidity is there in the market. That will come and reflate assets once again.

Therefore, we need to be in this game and not fret about poor economic conditions, which may hurt the markets later. I think the troubles are being pushed away into the future. People are focusing on market performance, stock prices and liquidity. That can be a powerful game when it plays out and that is probably what we need to get some handle on, whether this policy that we are also focused on will be probably not such an important thing as we are discussing next week and the global issues will be far more important.

There are deep problems with the global economic scenario later this year, but whether we get a few months of a spectacular rally going out here before those things come to roost is certainly a possibility. So, for the Nifty from the purge that it is in now at 6000 the next big thing is 6100 which is the high for this year. Will it be taken out? If there is a policy disappointment we can certainly go back, but if this global momentum continues it is possible that we even stretch our lead above that 6100 level.

If the 25 basis points (bps) repo happens, stock markets might react today. Bank Nifty has gone up 11 percent in the last ten days. We will probably see a reaction in bank stocks, the Nifty can go down to 5,850-5,900 kind of levels, but I do not think the world will come to an end if we get only 25 bps. If we get 25 bps repo cut plus 25 bps CRR cut, which means there will be some transmission as in the banks will pass down some of this rate cut. Then stock markets might hang in here, there might be a small rally then profit taking. Stocks have already gone up, but essentially a flat kind of scenario eventually in 24 hours time.

So, a 50 bps will be a surprising outcome after what we heard yesterday. In that case there will be a rally, maybe the Nifty goes to 6,100 in the near-term. Better still if there are better global cues. The index can even cross over that. However, one should keep expectations tempered as we go into the event today. Not to expect the moon from the RBI, specially in the light of the language that we heard yesterday and then take it as it comes.

In any case, unless there is a huge positive surprise, the bigger trigger is the global outcome in the rest of May. On that I am a little unclear because the economic data and the liquidity parameters and the risk-on parameters are blowing in different directions. That is not a surprise because it often happens with markets and economies, but that is the key in deciding whether we get a May correction or an extension of this rally.

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