Tuesday, 10 September 2013

How long can Raghuram Rajan keep the bears at bay?

How long can Raghuram Rajan keep the bears at bay?

Till the RBI policy meeting on Sept 20; the bullish sentiment looks certain owing to current wave of optimism running high on Dalal Street.
Till the RBI policy meeting on Sept 20; the bullish sentiment looks certain owing to current wave of optimism running high on Dalal Street.
The Indian stock markets seem very optimistic about the Reserve Bank's new chief, Raghuram Rajan, given his agenda to revive a sagging economy in the face of global headwinds.

Ignoring all the negatives, domestic as well as global, the Sensex has rallied 1,000 points in three days, sitting well above its psychological level of 19,000.

But the big question bogging the minds is: till how long can Rajan keep the bears at bay, all because of the negative news flow on growth data?

Till the RBI policy meeting on September 20; the bullish sentiment looks certain owing to the current wave of optimism running high onDalal Street.

But then, what after September 20? Well, here's how we are poised:

RBI meets on September 20

Rate cut looks probable, while rate hike looks distant. Monetary tightening by the RBI at its September 20 policy meet does not sound feasible, argue analysts at Deutsche Bank: "Traveling through Europe and England this week, we have encountered a view from some investors that there is a trade-off between FX stability and economic growth, and the RBI, under the newly appointed governor Rajan, needs to follow up its July tightening measures by even more rate hikes to support the rupee. This would inevitably entail further 'sacrifice' of growth, as per the view."

"The view has been bolstered by governor Rajan's inaugural statement, where he stressed the importance of low and stable inflation, regardless of its source (FX pass-through, demand pressure, supply shock). But beyond the discussion on price stability, the rest of the governor's statement was geared toward lowering the cost of doing business. Indeed, we think that RBI is done with tightening for now."

So, are the bulls riding on expectations of a soft monetary policy from Raghuram Rajan on September 20? "If the market is expecting a soft monetary policy from him, it is going to be greatly disappointed. Keeping inflation expectations down is going to be top most priority, but that does not mean a loose monetary policy. Moreover, we are going to see much higher numbers on WPI inflation over the next 5-6 months, It could go up to 9-10% by December or January partly because of the depreciation of the rupee and partly because of the base effect in the index. Under these circumstances, it would be very surprising if we will see interest rate cuts," says Vibhav Kapoor of IL&FS.

QE tapering and Syria

This comes ahead of the RBI's monetary policy. Will the US Federal Reserve press the red button given the pace of recovery of the American economy? Most likely, it's a no. It is widely speculated that the bond-buying programme will be tapered by $5-$10 billion for now.

"We believe September could be a volatile and tricky month for investors in Indian equities, given a substantial event calendar. JPM believes that risks to the equity markets over the coming months is biased towards the downside and recommends staying hedged on long positions in equities," said Bharat Iyer, MD & Head Of India Equity Research at JPMorgan.

"The Syrian issue and the FOMC meeting are of particular relevance to India. We believe that dependence on external energy and capital are the most substantive vulnerabilities of the Indian economy," he added.

"The (tapering) is bound to happen, and come September 18 you will have taper talks all around the globe. Beyond that, you have the structural problems of India which are not going anywhere in hurry," said Phani Sekhar, Fund Manager-PMS, Angel Broking, in a note.

The rupee factor

"The market will bottom out once the currency stabilises at a certain level. When the rupee stabilises, it will appreciate strongly and that will bring a lot of positive sentiments. If the currency starts to appreciate, the sense of goodwill about the country will suddenly improve dramatically. A lot of people will jump in to buy some attractive stocks, which now are waiting on the fringes for the currency to stabilise," said Neelkanth Mishra, India Equity Strategist,Credit Suisse, in an interview with ET Now.

"I expect the rupee to actually go back to 57-58 levels and in six to nine months India will look very-very different from what it is now," he said.