Some Stability After The Volatility

The last fortnight was an extremely crucial time for the Indian equity markets, with two important events on the anvil. One was the RBI’s announcement of the mid-quarter review, and the other was the Federal Open Market Committee (FOMC) monetary policy meet. Such was the gravity of these events in the whole scheme of things that the indices seemed to anticipate them with bated breath, remaining range-bound in the run-up to the crucial dates.

The street anticipated a 25-50 basis points repo rate hike from the RBI based on inflation consistently remaining at the higher levels, and the FOMC was expected to provide some direction on its QE taper plans.

Had both these developments unfolded simultaneously in the manner it was believed they would, the markets would surely have tanked. However, contrary to expectations, Dr Rajan maintained status quo on the rates. The pleasantly surprised markets swung into a new orbit. The RBI governor stated in no ambiguous terms that he would need to look at more data points and take a call based on that. The subtext to this, we feel, was that he wanted to take a look at what US Fed holds out for global investors.

On the FOMC front, anticipations ran high of an early start to tapering by the Fed and the resultant fund outflows from the emerging markets, especially India. As anticipated, the US Fed announced its plans to reduce its bond buying program by USD 10 billion, taking it to USD 75 billion from the levels of UD 85 billion per month.

With both these verdicts favouring the markets, equity markets worldwide shot through the roof to touch new yearly highs. India was no exception to this. The US equity indices also soared to their all-time high levels. The lower taper figure was backed by the IMF, indicating a better-than-expected recovery in the US economy.

In the domestic markets, as the Sensex soared, the sectoral indices also saw an up-move. Rate-sensitive sectors like realty received a major boost. The Mid-Cap and Small-Cap indices also saw a major rise. Shrikant S Chauhan, Senior Vice President – Research, Kotak Securities expressed his view saying, “Right now we are expecting activity in technology stocks. Old economy stocks will also attract value because this time we have seen very good volume activity based on technicals in all the old economy stocks like metals, capital goods and engineering."

A noticeable factor in the last fortnight was that even after the taper announcement, the FII inflows have been strong at around Rs 12350.80 crore.

While the last fortnight was quite eventful, we see the markets remaining range-bound for a week with the absence of major triggers and the holiday season in the US markets. The markets may regain momentum as fresh allocation of fund happens in the new year.