On domestic front, India suffering from combination of high inflation and low growth
In early January 2012, the dollar was trading at 53.30 to the rupee. It is now at around 62.5, down from a high of 68. In that 21-month period, the Nifty has returned about 25-26% in rupee terms.
This is a positive return even allowing for rupee depreciation. It is also fantastic, given that the fundamentals of the Indian economy have gone from bad to worse in the same period.
There's also strong consensus that a recovery will take a long while, so it's not as though there's an immediate upside.
This week, we'll see some clarity on monetary policy. RBI chief Raghuram Rajan delivers his first policy review and every word he speaks will be analysed. However, his policy choices are severely limited. On the domestic front, India is suffering from a combination of high inflation and low growth.
It also has a massive current account deficit and of course, a huge fiscal deficit as well. Both deficits will reduce this fiscal but only at the cost of lower growth.
The weaker rupee guarantees that energy costs will stay high. Food prices are also at double-digits and likely to stay up, despite a good monsoon. Rajan's advent has stemmed the rupee decline because the FIIs have some degree of faith in him and they have bought substantially in September.
However, he now has to perform a tight-rope act to balance all the concerns.
One major issue is likely to be the tapering of QE3 by the US Federal Reserve. It may not happen this month but it will happen soon. The threat of tapering has pushed dollar treasury yields up substantially.
As and when there is a taper, doallr interest rates are likely to rise more, and the currency will harden. India will also have to raise rates to ensure that portfolio investors don't exit en masse.
This will be a delicate job. India needs an undervalued rupee. There is no easier way to restrain imports or to make exports more competitive. However, India cannot afford to see the rupee crash suddenly with high volatility.
Nor can it afford to have the rupee fall till levels where crude oil import costs inflate unmanageably and inflation spirals out of control. The RBI will have to take a call on where it wants the rupee and also try to ensure that further depreciation is orderly. On Friday, we'll get an inkling about how it intends to go about this.
My best guess is that Rajan won't touch policy rates or do anything much at all. He may ease the Cash Reserve Ratio (CRR), or lower the interest rates on the MSF (Marginal Standing Facility) but that's against the odds. If he does nothing, the Bank Nifty and the market will head down. If he does cut CRR, there may be a relief rally.
Either way, settlement week is likely to be volatile. The Bank Nifty could swing 1,000 points in either direction in the last five sessions of the September settlement.
In early January 2012, the dollar was trading at 53.30 to the rupee. It is now at around 62.5, down from a high of 68. In that 21-month period, the Nifty has returned about 25-26% in rupee terms.
This is a positive return even allowing for rupee depreciation. It is also fantastic, given that the fundamentals of the Indian economy have gone from bad to worse in the same period.
There's also strong consensus that a recovery will take a long while, so it's not as though there's an immediate upside.
This week, we'll see some clarity on monetary policy. RBI chief Raghuram Rajan delivers his first policy review and every word he speaks will be analysed. However, his policy choices are severely limited. On the domestic front, India is suffering from a combination of high inflation and low growth.
It also has a massive current account deficit and of course, a huge fiscal deficit as well. Both deficits will reduce this fiscal but only at the cost of lower growth.
The weaker rupee guarantees that energy costs will stay high. Food prices are also at double-digits and likely to stay up, despite a good monsoon. Rajan's advent has stemmed the rupee decline because the FIIs have some degree of faith in him and they have bought substantially in September.
However, he now has to perform a tight-rope act to balance all the concerns.
One major issue is likely to be the tapering of QE3 by the US Federal Reserve. It may not happen this month but it will happen soon. The threat of tapering has pushed dollar treasury yields up substantially.
As and when there is a taper, doallr interest rates are likely to rise more, and the currency will harden. India will also have to raise rates to ensure that portfolio investors don't exit en masse.
This will be a delicate job. India needs an undervalued rupee. There is no easier way to restrain imports or to make exports more competitive. However, India cannot afford to see the rupee crash suddenly with high volatility.
Nor can it afford to have the rupee fall till levels where crude oil import costs inflate unmanageably and inflation spirals out of control. The RBI will have to take a call on where it wants the rupee and also try to ensure that further depreciation is orderly. On Friday, we'll get an inkling about how it intends to go about this.
My best guess is that Rajan won't touch policy rates or do anything much at all. He may ease the Cash Reserve Ratio (CRR), or lower the interest rates on the MSF (Marginal Standing Facility) but that's against the odds. If he does nothing, the Bank Nifty and the market will head down. If he does cut CRR, there may be a relief rally.
Either way, settlement week is likely to be volatile. The Bank Nifty could swing 1,000 points in either direction in the last five sessions of the September settlement.
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