Ask Mint | Decisions by RBI and US Fed to influence the markets this week

Ask Mint | Decisions by RBI and US Fed to influence the markets this week
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First Published: Mon, Apr 28 2008. 12 21 AM IST

Not that gloomy: Onlookers, reflected in a car window, watch share prices on a screen on the facade of the Bombay Stock Exchange
Not that gloomy: Onlookers, reflected in a car window, watch share prices on a screen on the facade of the Bombay Stock Exchange
Markets ended higher for the third week in a row on growing optimism that the global financial crisis is nearing its end. A slew of positive domestic corporate results have reinforced faith that the much-talked about slowdown in the Indian economy may be a temporary phase. Better-than-expected earnings and revenue guidance by global companies, especially in the US, have put to rest overblown concerns over a recession abroad.
Not that gloomy: Onlookers, reflected in a car window, watch share prices on a screen on the facade of the Bombay Stock Exchange
At the end of the week, global markets closed with optimism about the future with gains likely in coming weeks. Going by the latest results of Google Inc., Apple Inc., Caterpillar Inc., and banks and financial institutions such as Citigroup Inc., JPMorgan Chase and Co., American Express Co., etc., it is clear that the slowing of the US economy was set off by the depreciating dollar and robust global demand as these companies and many more posted results well above market expectations.
Last Friday’s gains on the US bourses, despite weak consumer confidence data, were triggered by American Express, whose results beat expectations though its quarterly profit fell. The company also affirmed its full-year earnings forecast. This was confirmation that in general, all consumers were not affected so badly as it is perceived.
Although Microsoft Corp. disappointed with its results, which pulled down the Nasdaq to the red on Friday, it gave a positive outlook. Moreover, its tug-of-war with Yahoo Inc. this week will be watched carefully, as its deadline to Yahoo for the $44 billion offer expired on Saturday.
If Yahoo responds positively to Microsoft’s offer, which is unlikely, then there could be sharp movements on the bourses. If it does not, Microsoft may use its other options of either withdrawing the bid, or going hostile. It would be interesting to see how the markets react to such moves.
Going forward, this is going to be a very crucial week for the world and India. The Reserve Bank of India, or RBI, will meet on 29 April to review its credit policy. It will find it difficult to deal with the situation given the high inflation, pegged at 7.33% on Friday, and considering the rising global commodity, metal and crude prices.
Though the impact of its earlier measure including a hike in the cash reserve ratio will be reflected only later, a close look at the money market suggests there is ample cash in the system as call money rates hovered around 5.2-6% on Friday despite the first stage of RBI’s hike in cash reserve requirements taking effect on Saturday.
Moreover, volumes in call money markets and traded volumes on collateralized borrowing and lending obligations, or CBLO, a secure form of money market lending, were also lower. This also suggests that there is ample money in the system and that the demand for funds is low.
Going by an estimate, the additional liquidity in the system is about Rs35,000 crore, and taking into account the impact of the cash reserve hike, only Rs18,000 crore will be drained from the system. This means the tightening may not be very effective.
In such a situation, confusion over the outcome of the 29 April meeting heightens, as it will be really interesting to see what the RBI does. If the interest rate is raised, it would be a maximum of 25 basis points, or quarter of a percentage point. Anything above that could have a negative impact on economic growth and may also hamper supply.
There is also speculation that RBI may allow the rupee to appreciate to combat inflation. With so much of uncertainty, I think markets would wait and watch with positive undertones before the crucial review.
As far as the outcome is concerned, I think that a hike in interest rates by more than 25 basis points would affect markets negatively, though temporarily. The likely impact of other options are already discounted. I am hoping markets to rise following RBI’s review, given the options available and chances of exercising them by the central bank.
The wait-and-watch mood extends globally in view of the crucial meeting of the US Federal Reserve on 30 April, when it might decide on a further cut in interest rates. The Fed will announce its decision at 11.45pm IST on Wednesday.
However, unlike previous occasions, this time the decision is not so clear and there is confusion over what the Fed will do. Going by the Fed funds futures, chances are that it may cut rates by a maximum of 25 basis points with a 25% chance of skipping the cut altogether. Since corporate results so far have put to rest overblown fears of a recession, the Fed might also go slow on interest rates.
Moreover, the US commerce department will on Wednesday release the gross domestic product data for the first quarter. This would be critical as expectations are that the US GDP grew 0.2% in the quarter. If that is so or better, the Fed would not cut rates in its 30 April meeting. It would then be good news for the US and other global economies because it would signify that the US is not into recession but has just slowed down.
But if the GDP figures are negative, there would be some gloom in markets and the decision of the Fed on interest rates would become even more critical.
If despite weaker -than-expected GDP data, the Fed holds the rates, it might trigger a sell-off, though any cut would be welcome on hopes that corporate performance and revenue guidance continue to remain impressive. With the settling of the credit crisis dust, and with the additional thrust of lowered interest rates, the US economy will have a fair chance of bouncing back this quarter.
Since a lot remains uncertain, there would be news-based movement on US bourses, which would keep the momentum positive ahead of the Fed meeting. The monthly payroll data will also be watched keenly this week.
Technically, markets are on the upswing and the trend is likely to continue. On its way up, India’s benchmark Sensex is likely to face its first resistance at 17,323 points, which is a moderate resistance level. If it advances with rising volumes, the next resistance will come around 17,785 points, following which there would be a strong resistance at 18,246 points.
On its way down, the Sensex would test its support at 16,855 points, and if this support is broken, then the next support will come at around 16,566 points, which will be a key support level. If the Sensex falls further, it would find support at 16,398 points.
This week on our technical radar are stocks such as Bajaj Hindustan Sugar and Industries Ltd, Kotak Mahindra Bank Ltd and Steel Authority of India Ltd. Bajaj Hindustan at its last close of Rs239.40 has a target of Rs254 and a stop loss at Rs226. Kotak Mahindra at its last close of Rs760.40 has a target of Rs784 with a stop loss of Rs737. Steel Authority at its last close of Rs177.20 has a target of Rs187 and a stop loss of Rs168.
From our last week’s recommendations, Karnataka Bank Ltd failed to meet its target of Rs224 and touched a high of Rs215. Reliance Capital Ltd, recommended at Rs1,350, touched a high of Rs1,472, which was well above its target of Rs1,418. IVRCL Infra and Projects Ltd, recommended at Rs398, touched a high of Rs435, which was well above its target of Rs421.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Mon, Apr 28 2008. 12 21 AM IST