Dancing to the hopes of a rate cut, Indian equity benchmarks climbed 1.7% higher to their highest close in six weeks.
India's 30-share Sensex index rose 1.63% on Friday to 16,949, posting its highest close since May 3. The broader 50-share Nifty advanced 1.67% to 5,139. For this month itself, Indian equities have rallied over 4.5%, outperforming its major Asian peers.
Ever since India posted its weakest growth in nine years for the January-March quarter, expectations are that the Reserve Bank of India will switch its focus from inflation to growth. According to a CNBC-TV18 poll, consensus on the street is that the central bank will deliver a 25 basis point rate cut come Monday.
Majority of bankers and economists polled by CNBC-TV18 say that RBI will cut repo rate by 25 basis points on June 18. However, the market is still divided over whether the RBI will move on CRR.
According to Ajay Bodke of Prabhudas Lilladher, the market has discounted a quarter percent cut in the repo rates and the cash reserve ratio (CRR), so there may not be a big bounce on Monday. “If the RBI were to indulge the market and go in for a 50 bps cut, only then will the market get a strong bounce,” he said.
However, a 50 basis point cut is unlikely in his opinion because of the stubbornly high inflation. Data this week showed India's wholesale price index accelerated to 7.55%. On the bright side, core inflation came in at 4.99%.
Executive Director of Tata Investment Corporation Amit Dalal says the RBI credit policy and the Greece elections do not have the ability to change the course of the market over a long period of time. “Wherever we go from here, whether it is 5,200 or a correction, I think it is going to be Thursday or Friday onwards that you have to take stock of the market,” he said.
D-Day for Greece
Indisputably the most awaited global event right now, the Greece elections are a make or break for financial markets worldwide. With the debt-laden nation running out of money to pay its bills by the end of this month, the formation of a majority coalition is key in determining the future for Greece.
However, if far-left party Syriza wins majority vote, we could see Greece exit the eurozone. Led by Alexis Tsipras, Syriza is against further austerity measures or a bailout for Greece, which could be potentially catastrophic.
On the other hand, if the New Democracy manages to secure enough votes along with Pasok support, Greece could survive for the next few months atleast.
With all the talk about a possible ‘Greexit’ doing the rounds, the Ministry of Finance (MoF) set up a taskforce to examine various scenarios. An exit could see investors fly to safe havens instead of risky assets, and that is bound to hurt India which is heavily dependent on foreign inflows. Not only would it cripple the stock market, but the rupee would also see more weakness.
Bruno Verstrate, CEO of Lakefield Partners, believes that Germany and the European Central Bank will do everything possible to forestall a Greece exit, but adds that the bigger problems are emerging from Spain and Italy. “The biggest worry is whether the contagion to Spain and Italy can be held under control because the ECB and Germany cannot afford to let Spain or Italy go,” he explained.
Gary Baker of BofA Merrill Lynch Global Research also says that Spain and Italy have snowballed into a bigger problem than Greece, and that they will influence global markets going forward.
Battle for Rashtrapati Bhavan
We have elections coming up at home as well, the Presidential polls, and this year they have taken a twist for the worst. The routine process suddenly blew up into a big affair after Trinamool Congress chief Mamata Banerjee and Samajwadi Party leader Mulayam Singh Yadav nominated APJ Abdul Kalam, Somnath Chatterjee and present Prime Minister Manmohan Singh for the post. This came after Mamata announced that the UPA’s candidates were Vice President Hamid Ansari and Finance Minister Pranab Mukherjee.
Today, however, the Sonia Gandhi led UPA announced Finance Minister Pranab Mukherjee as their leading candidate. Therefore he will be resigning from his Finance Ministry post soon. The government is already on the lookout for a replacement if he wins.
Ajay Bodke is of the view that the market is now starting to speculate on the presidential polls, and that it will be the third event that the market will looking forward to along with the RBI policy and the Greek results.
Dalal agrees, saying that “the market will wait to see if this realigns the political forces within Delhi and whether this will give us the next cause for any change in government performance on the economic front.”
Both believe there are a few candidates who are appealing and acceptable to the stock market who could take Mukherjee’s place as Finance Minister.
The battle for the post of President has revealed cracks in the coalition government, and some experts say we could see mid-term elections if the UPA’s candidate doesn’t win.
Future Tense for Market
Events lining up in the near-term might help boost the market, but on a macro level the situation is still relatively bleak. GDP continues to grow at a sticky pace, inflation stubbornly high, current account deficit at record highs and the rupee at record lows.
In such a scenario, investors are wary of entering risky assets because the risk-reward still looks unfavourable.
Amit Dalal sees the market stuck in a trading range over the medium-term. “The market will remain range bound for a while until we start seeing change in government policy, change in the basic fundamentals, whether it’s improvement in earnings or drop in inflation,” he said.
His advice to investors is to ride the wave the RBI policy will give the market, but then book profit by the end of the next week. “I don’t think the RBI policy and the Greek elections have an ability to allow this market to go up much further,” he explained.
On a positive note, Dalal says the worst-case scenario wich people were looking at a while back, which is the market drifting down to 4500 levels, is off the table. He believes we will need to see major negatives to pull the Nifty down to the December lows once again.
The case for rejuvenation towards the middle or the end of the year remains strong, so his strategy is to look at any correction as an investment, and any leg up as an opportunity to book profits.