Investors wait for RBI rate tweak and Diwali

K. RAGHAVENDRA RAO Updated - March 10, 2018 at 12:51 PM.

FII flows may be volatile due to global uncertainty, rupee movement

A file picture of flags of the European Union member states on display at Warsaw, Poland. The European Financial Stability Fund is scheduled to meet on Wednesday to take some important decisions.

There are indications of a 50 basis point hike by the Reserve Bank of India (RBI) in its policy pronouncement on Tuesday.

The financial markets have already factored in a 25 basis point hike. A 25 basis point hike will take yields on Government securities (G-Secs) to 8.9-8.95 range. Anything higher could mean breaching the 9 per cent level.

For those long on equity, a 50 basis point hike is negative; while a pause by the RBI would have the same effect on those with short positions on equity.

The market is showing very little interest in the equity derivatives expiry as it falls on the day of the policy announcement.

As the new expiry starts on Diwali, there are a lot of fence-sitters in the market and any strength on the Sensex and the Nifty without commensurate traded volume would be meaningless.

However, stock markets have traditionally closed in the green during muhurat trading.

Trading volumes could be affected as stock markets in India would be open partially on Wednesday and closed on Thursday.

FII flows would be volatile and largely dependent on the global environment and the rupee-dollar balance.

Month-end oil payment outflows and FII outflows due to any persisting crisis in the Euro-zone could keep the rupee weak versus the dollar. This is already reflected in the 10-year G-Sec yield, which closed at 8.82 per cent last week.

Those in the trade are talking of an increase in the FII limit for investment in G-Sec from $10 billion to $15 billion as existing limits have already been exhausted.

Global events

The overall situation is very volatile and outcomes will be contingent on events unfolding.

Globally, next week is very important for two reasons. The first is the outcome of Wednesday's deliberations of the European Financial Stability Fund (EFSF), a special purpose vehicle created by Euro-zone member countries to tackle their sovereign debt crisis. The agenda is to decide on the quantum of debt to be written off —which could be as large as €1.3 trillion — and how it would be done.

Secondly, the third quarter US GDP growth numbers are expected on Thursday. Analysts have pegged a growth of 2.5 per cent on an annualised basis as against the 1.3 per cent growth shown last year.

If the US GDP data goes according to expectation, the benchmark 10-year US Treasury yield should harden; anything below expectation would soften the yield. The benchmark yield in 2011 had bottomed out on October 3 at 1.8 per cent and closed on October 21 at 2.23 per cent.

The most important currency pair to watch out for this week is the euro-dollar, which is expected to stay flat and kill time.

The International Monetary Fund, in its World Economic Outlook, has flagged some pertinent points that investors need to look at.

IMF cut

The fund cut its global GDP growth June 2011 forecast by 30 basis points to 4 per cent and cut India's growth rate by 40 basis points to 7.8 per cent. It said that downside risks to activity had increased since June 2011. As a result, advanced economies needed to repair their public and financial balance sheets while emerging markets needed to guard against an overheating economy and a credit boom.

The fund also expressed concerns over high unemployment levels world wide and observed that economic policy making across the world was not sufficiently proactive.

It also said that volatile commodity prices and geopolitical tensions deserved attention.

Published on October 23, 2011 15:50