The market is behaving exactly as expected. A ‘hope rally’ is underway and that is getting euphoric by the day. Political developments are gathering pace and overshadowing economic fundamentals right now. As campaigns gather steam, the markets too are heating up on hopes of a more stable and strong government coming to power. Notably, FIIs the largest pack of investors in the Indian markets is getting to be more positive on it.

While the domestic scene, driven by political developments is the principal reason for them to be positive, there is more to it. This has been discussed here earlier too. Right now, the India, among Emerging Markets, seems to be the best bet for them. China is going through its own set of problems. Russia is in the midst of a geopolitical turmoil. Life in Brazil is going on at its own pace. All of this, essentially puts India high on the list of the FIIs.

The only worry with Emerging Markets is the flight of the dollar which can trigger a reversal of returns. But there too, the Indian markets scores higher than the others. The INR (Indian currency) has stabilized well over the past couple of months. Improvement in the CAD situation and the coming down of inflation are pointing towards better fiscal health at least for now.

These coupled with the fact that on the valuation front, Emerging Markets are looking better than their western counterparts is helping a lot in pulling more and more foreign portfolio capital flows to Dalal Street. 2013 has been a stupendous year for the US markets. That has led to valuations looking stretched out there. Compared to that, Emerging Markets, especially India have actually declined in US dollar terms during the same period and that makes the case for a good show this year, especially now that the currency is back to saner levels vis-à-vis the dollar. This is why markets are witnessing a good amount of money flow from foreign shores.

While the dollar flows keep coming, there are certainly expectations being built around key events to happen soon. The first of it is due 1^st April. Dr Raghuram Rajan and his team will deliver the first punch to the markets. The next few days will see the speculative build around possible scenarios on the interest rate front. While a consensus is emerging on a status quo, there is also some noise about a rate cut.

While a status quo is a given, there is a clear case for reduction of interest rates. Let me repeat what I have said earlier too. It would well be in the interest of the RBI to cut rates at this stage where inflation is apparently on the lower side. Very soon the impact of unseasonal rains and hailstorms which has destroyed a good amount of crop will push inflation on the higher side. That will be a time when rates would have to go up again and hence preparing ground for such an eventuality is a necessity right now.

While the speculations get more intense, here is what happened in overnight trades. The US markets looked up after the Consumer Confidence Index (CCI) hit a six year high. The higher count of the CCI reflects on the expectations of the consumers who believe the economy will continue to do well and gather further momentum as time progresses. The Dow ended the day up more than half a percent while the S&P 500 was up 0.44% on close yesterday. Earlier, European stocks too rose on the upbeat US data coupled with hopes that weaker Chinese macros will prompt further easing out there.

Asian markets seem to have taken cues from these overnight developments and are trading firm this morning. The Japanese Nikkei is up 0.15% as of now while the Shanghai Composite is on the borderlines but trading with a positive bias. Hong Kong is by far the strongest of the pack with the Hang Seng up more than a percent. Singapore, Korea and Taiwan are trading quite positive. Benchmarks in all three of these countries are up an average one percent as of now.

Things are looking positive this morning. The flat close yesterday and global cues today are pointing towards a positive open and a good trading day, so to say. The SGX Nifty is currently up 27 points and that reflects the mood on Indian equities. It could be a volatile session within a range of 50 to 100 points on the Sensex.