September is likely to be a decisive month as regards investor sentiment as well as broad equity market direction. This is owing to the three monetary policy “events” – RBI monetary policy announcement, US Fed stand on QE-3 and ECB’s monetary policy meeting. Over last few weeks, investors globally have come to hope positive outcomes from the second and third while the Indian investors have started to assume no change in RBI’s hawkish stance as regards the first.
We expect these three “events” to have very different degrees of impact on Indian equity and debt markets. The RBI policy announcement is likely to be least influential – largely owing the widespread expectation of no repo rate cut. ECB policy is likely to somewhat more influential – to the extent that it is widely believed to be at least incrementally useful in resolving the sovereign debt crisis in Eurozone. We expect a mildly positive influence on Indian equity markets from the ECB meeting. The Fed announcement of QE-3, if it does happen, is likely to be a massive sentiment and liquidity boost to all risk assets including Indian equities. Also, owing to at least some anticipation having already been built into global investors’ calculation as regards this, a decisive lack of anything like a QE would also lead to a mild dampening of sentiment, leading potentially to a mild correction. As we highlighted in the last month’s newsletter, we do not expect a QE announcement to be very likely.
A very positive development in recent weeks has been a finance ministry-driven top-down “directed” transmission of earlier repo rate cuts made by RBI into lower cost of loans extended by banks. This helps to correct the unusual divergence which had developed between some monetary easing – which RBI did do earlier this year – and almost no change in cost of credit for the real economy – which was because banks held their base rates nearly unchanged through this monetary easing. Now that the finance ministry has forced some of the monetary easing into the banking system, we may expect some delayed positive influence on infrastructure spending and automobile sales, and potentially end-user driven real estate transactions. That might help boost the sagging growth momentum.
This does open up a very interesting debate though – if banks are reluctant to lend at lower interest rates, that was probably because their credit growth was satisfactory at the earlier lending rates. This is also borne out by the deposit and credit growth numbers through last few months. If that is the case, it remains to be seen if the lower cost of credit brought about by finance ministry intervention would increase inflationary pressure. If so, RBI’s cautious stance on interest rates would not be incorrect.
To get a copy of Advise for the Wise click here
We expect these three “events” to have very different degrees of impact on Indian equity and debt markets. The RBI policy announcement is likely to be least influential – largely owing the widespread expectation of no repo rate cut. ECB policy is likely to somewhat more influential – to the extent that it is widely believed to be at least incrementally useful in resolving the sovereign debt crisis in Eurozone. We expect a mildly positive influence on Indian equity markets from the ECB meeting. The Fed announcement of QE-3, if it does happen, is likely to be a massive sentiment and liquidity boost to all risk assets including Indian equities. Also, owing to at least some anticipation having already been built into global investors’ calculation as regards this, a decisive lack of anything like a QE would also lead to a mild dampening of sentiment, leading potentially to a mild correction. As we highlighted in the last month’s newsletter, we do not expect a QE announcement to be very likely.
A very positive development in recent weeks has been a finance ministry-driven top-down “directed” transmission of earlier repo rate cuts made by RBI into lower cost of loans extended by banks. This helps to correct the unusual divergence which had developed between some monetary easing – which RBI did do earlier this year – and almost no change in cost of credit for the real economy – which was because banks held their base rates nearly unchanged through this monetary easing. Now that the finance ministry has forced some of the monetary easing into the banking system, we may expect some delayed positive influence on infrastructure spending and automobile sales, and potentially end-user driven real estate transactions. That might help boost the sagging growth momentum.
This does open up a very interesting debate though – if banks are reluctant to lend at lower interest rates, that was probably because their credit growth was satisfactory at the earlier lending rates. This is also borne out by the deposit and credit growth numbers through last few months. If that is the case, it remains to be seen if the lower cost of credit brought about by finance ministry intervention would increase inflationary pressure. If so, RBI’s cautious stance on interest rates would not be incorrect.
To get a copy of Advise for the Wise click here
No comments:
Post a Comment