better late than never....

Cheers to Mr. Chidambaram for igniting the spark in the markets

The bearish set up in asset markets since February 2012 is now reversed. The outlook post Budget FY13 was bearish and confidence was weak driven by policy paralysis and poor fiscal conditions. The ability to roll-out next generation reforms and to cut subsidies was in doubt with strong opposition within and outside UPA. There was build up of fear of sovereign rating downgrade by global rating agencies. The external environment also was weak both in the Euro and US zones. It was no surprise that markets fell; NIFTY down from 5630 to 4770; rupee down from 48.60 to 57.33 and 10Y Bond yield rose to 8.79%.  

Come September2012, roll-out of QE3 by FED provided energy into asset markets. The external cues turned favourable. There is confirmation of appetite for India investments and availability of liquidity into Indian markets till 2014-2015. The new FM decided to take the bull by its horns with sudden announcement of reforms and fuel price hike. The resultant opposition is now met firmly with no fear of roll-back of announcements. There is also hope for follow-on reforms with start of cut in withholding tax on external borrowings. Markets responded swiftly, NIFTY is already above February high of 5630 and Rupee is up at 53.35. Bond market is also in bullish mode on expectation of RBI’s shift into growth supportive stance sooner than later.

The recent market actions since February 2012 would have hurt many. The single point factor to this turn-around story is the shift of Government stance from near paralysis to action, come what may. It was a “perform or perish” case for the Government (which MARKET PULSE discussed in its 21^st March 2012 research report) and it needed crisis kind of situation for the Government to get into action before it is too late!

What next? All negative factors have turned positive and favourable. The strong tail wind from external sector is there to stay for long. There will be regular and continuous flow of liquidity and investments into India. The economic improvement in western countries will be good to increase demand for India’s goods and services. On the domestic front, it is safe to assume that fear relating to policy paralysis and fiscal consolidation is out of the way. Global rating agencies will reinstate the outlook to positive and improvement in fiscal condition will lead to possible upgrade in sovereign rating. There will be no case for RBI to delay shift into growth supportive monetary stance and into very dovish stance on inflation inching into its comfort level. The combination of favourable cues from both domestic and external sectors can only lead to bullish expectation on asset markets. NIFTY will regain its November 2010 high of 6338; Rupee will extend its gains into 50 and easing interest rates will drive 10Y Bond yield into 7.75%. MARKET PULSE advised to stay invested and those who are not, it is time to catch the next leg of the rally. It is unwise to stay in cash or low yielding low risk assets.

Moses Harding