Central banks could hold sway over markets

Actions of two central banks could determine the direction of Indian stocks in the week ahead. While the Reserve Bank of India (RBI) decision on policy rates is likely to set the tone for domestic stocks this week, the outcome of the US Fed’s two-day meet ending Wednesday — which could give some clarity on its monetary policy outlook — could have wider implications on  global financial markets.

   Hopes of a policy-rate or repo rate-cut by RBI have diminished following the recent decline in the rupee against the dollar. So, if the Indian central bank keeps the repo rate (at which it lends to banks) intact, markets would not be disappointed, said fund managers.

 After RBI’s meeting, investors will closely watch the US Federal Open Market Committee meeting. If Fed chairman Ben Bernanke signals that the US central bank might cut down its bond buying programme known as Quantitative Easing 3 (QE3), it could weigh down sentiment in emerging market equities including India’s. The liquidity from QE3 has made its way to equity and bond markets worldwide.

       Investors, however, think RBI might cut the cash reserve ratio (CRR) — the minimum amount banks need to hold with the central bank, to ease liquidity.

“A CRR cut of 25 bps is what some quarters of the market are looking forward to,.“With the declining rupee situation, high current account deficit numbers, markets are not expecting a repo rate cut.”