Mumbai: The stock market was delighted at the central bank playing along with the strong undercurrent by not raising interest rates, and chose to ignore cautious remarks on inflation.
Instead, it took heart from RBI Governor Raghuram Rajan’s comment that the market appears to have factored in a stable government and expectation of ‘rapid’ policy action.
Equities have rallied over the past few months, and tested lifetime highs on hopes of a stable government at the centre that will speed up reforms and revive investment in the country.
And why not? The RBI has, for long, expressed anguish at the policy inaction by the government on fiscal consolidation and measures to correct supply-side issues to combat inflation.
Rajan said if the budget presented by the next government is a strong one, it will put India firmly on the path of fiscal consolidation.
The central government’s fiscal deficit rose to 5.993 trln rupees in Apr-Feb, well above the revised Budget target of 5.245 trln rupees for the full year ending March.
Kotak Securities believes that formation of a stable government will provide higher visibility to cyclical and investment-oriented sectors and will also give an upward bias to the current market valuations.
“Over the medium-to-long term, initiatives to revitalise infrastructure investment, anchor inflationary expectations and control the ballooning subsidies, will be important pre-requisites for the markets to move up sustainably,” the brokerage said in a report.
The stock market also saluted some of the announcements in the policy, such as the move to shift valuation of shares in foreign direct investment deals to ‘accepted market practices’, as significantly aiding the investment climate.
This too would give a leg-up to investment in sectors such as real estate, market participants said.
INFLATION STORY Although Rajan did not make an ‘April Fool’ of market players, and left rates unchanged, his commentary on inflation has put a question mark on the future trend in interest rates.
RBI said that further policy tightening in the near term is not anticipated ‘at this juncture’, if inflation continues along the intended glide path, but reiterated that upside risks to inflation remain.
“While the RBI may be on hold for now, it does not mean that this is the end of the tightening cycle,” said Leif Eskesan, chief economist, at HSBC. Some believe that a rate cut may be unlikely this year.
“Despite the recent cool-off in headline inflation numbers, the future trend remains unpredictable,” said Varun Goel, head portfolio management services at Karvy Stock Broking. “RBI has maintained its target of headline CPI at 8% by January 2015 and 6% by January 2016.
We expect RBI to maintain status quo for some time to achieve these objectives as a significant drop in inflation appears unlikely in the short term,” Goel added. . BACK TO ELECTIONS With the RBI’s policy behind them, equity participants’ focus has moved back to the general elections.
Lok Sabha elections will begin on Apr 7 with the first phase of voting in Assam and Tripura. The optimism over a stable government has taken benchmark indices to new peaks. Today, Nifty ended at a record closing high of 6721.05 points, up 16.95 points or 0.2% from close Monday, after touching a lifetime high of 6732.25 intraday. S&P BSE’s 30-share Sensex ended at a record close high of 22446.44, up 60.17 points or 0.3%. Intraday, it scaled a lifetime high of 22485.77 points. Market participants see Sensex rising to 22800-23000 levels, and Nifty to close to 7000 points.
“The recent rally is due to improvement in India’s earnings environment, macro-economic situation, stabilisation of the currency and “political hope” about a strong and stable government,” said Manishi Raychaudhuri, Asia Pacific Equity Strategist at BNP Paribas.
But, market participants added that further gains are expected only after a minor consolidation. A few in the market also recommend some caution at this juncture.
“While the Indian market may be looking like a good play currently in the emerging markets space to most investors…let us wait and see once the election mania in India settles,” said Rahul Arora, chief executive officer at Nirmal Bang Institutional Equities.
“I have my reservations on the quantum of incremental inflows post the election results, regardless of the outcome, on the frenzied base we have already seen in the last couple of months,” Arora added.
Market participants recommend picking quality stocks with most favouring cyclical sectors.
“We would approach the markets with a focus on quality names in high beta sectors like banks, industrials and consumer discretionary and select defensives like IT where recent correction over-discounts the negative news flow for some stocks,” Raychaudhuri of BNP Paribas said.
Raychaudhuri believes that foreign fund inflows could be robust this year, but they may be slightly lower than the inflows seen in the last two years.