All of sudden sentiment changed bullish at Dalal Street, even as the developed and commodity markets, particularly gold, silver and crude oil have been declining sharply. The crash in crude and gold prices bodes well for Indian economy, as it will narrow down the irrepressible current account deficit.
For market, mellowed down current-account deficit, widely known as CAD, is one of the key factors for sustaining of the bullish momentum.
India's CAD widened because imports of goods, services and transfers (mainly gold and crude) was much higher than the total exports.
The RBI has cited containing the current account deficit as one of the key factors in monetary policy decisions.
According to Bank of America-Merrill Lynch estimates, a $10/barrel fall in oil price helps lower the CAD by 40 basis points (or 0.4 percentage point) and a $100/ounce lower gold price reduces the CAD by 15 basis points. Similarly, a $10 fall in oil prices reduces the fiscal deficit by 25 basis points.
“While RBI may cut rates faster than expected, the transmission of rate cuts will be slower than in earlier cycles. The Credit: Deposit ratio at 78 per cent is the highest it has been over past 15 years. Even adjusting for the lower SLR, this shows that ability of the banks to cut rates is lower than in earlier cycles,” said BofA-ML.
Aggressive rate cuts are likely to shore up confidence in economic growth and thus sparking potential gains for equity markets, as foreign institutional investments are expected to continue in the full flow.
However, Finance Minister Chidambaram had a word of caution. Speaking at the Peterson Institute for International Economics, he said: “Thanks to an accommodative monetary policy, there is a lot of capital flow into emerging economies. But if advanced countries begin to withdraw from quantitative easing, I don’t know what will happen to capital flows.”
If capital flows reverse, then our current account deficit begins to “come under pressure,” he added.
Other factors to watch this week include:
a) The second half of the Budget session will start from Monday. Budget session is important, as key Bills such as Land Acquisition Bill, Finance Bill, Insurance Bill etc await Parliamentary nod.
b) Result calendar: Cairn India and UltraTech Cement will unveil their quarterly number on Monday, HDFC Bank (Tuesday), Axis Bank (Wednesday), Biocon and Jindal Steel & Power (Thursday) and Hero MotoCorp, ICICI Bank and Maruti Suzuki India will declare their results on Friday.
c) India Meteorological Department is expected to release the monsoon forecast for this year later this week.
d) F&O settlement on the NSE on Thursday, as stocks generally turn volatile during the period.
e) Diageo open offer to United Spirits shareholders to mop up 26 per cent stake ends on Friday.