This week, the key indices may open on a weak note. Traders, the dominant and active players left on Dalal Street now, are fully-prepared with a defensive strategy. At the same time, they seem ready for a gear-change, if opportunity arises.
Optimists among the lot think that a good monsoon witnessed so far will take care of the local and the global woes. Some even hope that the Reserve Bank of India may not indicate an interest rate hike on September 16.
But the market still appears clueless about how to handle the global uncertainties. Local operators will, however, remain anxious over the timing of the possible arrival of overseas investors.
It is expected that the FII flocks would return anytime soon. But the twists and turns in the global financial markets are obviously holding them back.
Though top emerging markets like India may eventually start getting reallocations, it is difficult to hazard a guess when that will happen.
When the RBI board members meet this week for a policy review, they will, perhaps, have an inflation figure close to 10 per cent, and a weakening fiscal position. Against this backdrop, Deutsche Bank thinks that the RBI will be inclined to deliver one more 25 basis points rate hike. It also predicts that there may be scope for a prolonged pause after this policy measure.
Some market economists believe that the Indian rupee is likely to appreciate in the medium term because of the country's high growth potential. It is assumed that the country would attract foreign capital and run an ample BOP surplus.
Deutsche Bank says that this view would sustain even though it runs counter to the argument that India's persistent current account deficit and reliance on commodity imports make the exchange rate unlikely to help a trend-appreciation.
It, however, sees an additional force complicating the debate — inflation.
“The persistence of high inflation over a number of years is bound to impact the economy's competitiveness, as already evidenced by the rise in the real exchange rate. We see the rupee's vulnerability rising unless inflation is brought back to the previous trend of 4-6 per cent”, the recent note from the German bank says. It foresees that India's fiscal deficit will worsen to 5.5 per cent of GDP (as against the budget estimate of 4.6 per cent of GDP).