Rupee and stock markets are expected to rise on Wednesday after the government won the confidence vote ensuring its immediate survival, with analysts expecting it could revive some of its stalled economic reforms.
But economists expected rallies to be short-lived as concerns about inflation nearing 12 percent, high oil prices, slowing economic growth and rising interest rates are likely to return to the fore now the political uncertainty had faded.
"The markets will be relieved, and now that there is no uncertainty, investors will turn to the fundamentals, like inflation and oil and the global markets. Foreign investors will look at how further reforms take place," said Andrew Holland, head of the strategic risk group at DSP Merrill Lynch in Mumbai.
"The stock market is likely to go up by 1-2 percent in the morning, then we will go back to the fundamentals, locally and globally."
Ahead of the vote on Tuesday, which the government won by 275 votes to 256, the rupee ended at 42.73/74 per dollar, weaker than Monday's close at 42.68/69, but the 30-share index closed 1.84 percent higher at 14,104.20 points.
The stock market had climbed in anticipation of a government win for four days in a row ahead of the vote, rising off a recent 15-month trough of 12,514.02.
American depositary receipts also rose sharply after the vote.
The Congress-party led coalition won the confidence vote late on Tuesday with the help of regional parties, after splitting with its communist allies of four years, who pulled their support in protest at a nuclear energy deal with the United States.
Analysts said the government should now survive until the end of its term, with elections due by next May, although its joy at the victory was tempered by opposition lawmakers saying they were offered bribes to abstain.
REFORMS
Analysts said the government could now try to sell stakes in some state-run companies to boost revenues as its finances worsen due to oil and food subsidies. Finance Minister Palaniappan Chidambaram said it would work with other parties to take reforms forward.
The currency was also likely to gain with the political uncertainty out of the way and a revived reform agenda potentially bringing in foreign investment, economists said.
"There will be a knee-jerk positive reaction in the currency market and the rupee may open at today's high of around 42.58 per dollar and may even test 42.50," said Agam Gupta, head of trading at Standard Chartered Bank.
The rupee touched a 15-month low earlier in July of 43.50 per dollar, under pressure from a rising trade and current account deficit due to record oil prices.
The benchmark 10-year bond yield ended at 9.12 percent on Tuesday, above Monday's close of 9.06 percent. It hit a seven-year high of 9.55 percent this month on concerns about inflation and a rising oil subsidy bill.
Analysts said bonds were the least likely to get a boost from the confidence vote, with the market concerned the government would now borrow more to fund spending programmes and a possible increase in government worker salaries.
A bond auction is due on Thursday and then the central bank holds its quarterly interest rate review on July 29, when many expect it will tighten monetary policy further to rein in prices.
In June, the central bank raised its key lending rate by 75 basis points to 8.5 percent and also announced a 50 basis point increase in banks' reserve requirement to reduce surplus cash.
Source-ET |
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