Devangshu Datta: All eyes on the RBI policy statement

Expectations of a rate cut are high from almost all quarters. Considering that inflation is moderating and growth pace is slow, a rate cut is likely. Also, a rupee rate cut could help the currency slide against the dollar. It would also provide new impetus to markets

The Reserve Bank of India (RBI) policy statement on Tuesday is among the most awaited events on the financial calendar. "Everyone" expects a policy rate cut to back up the thrust of the Union Budget. So, a 25-basis-point (0.25 per cent) reduction in the repurchase rate is already discounted by both bond and equity markets. The policy statement by the RBI governor is also expected to be upbeat. Optimists are talking in terms of a bigger rate cut of 50 basis points. That would certainly add momentum to the bull run.

Rationally speaking, a rate cut is likely. Inflation is moderating and the pace of growth is slow. Inflation should moderate more, given the cut in gas prices. Early projections regarding the monsoon are positive and that would mean low food inflation. Government borrowing is also expected to be slightly less than in the last fiscal.

On the currency front, the dollar has dipped versus most currencies. In theory, a rupee rate cut should help INR slide though this won't happen if a rate cut attracts large inflows. The rupee has hardened by 2.9 per cent since the Budget. This is in part due to several dovish statements by the US Federal Reserve but mostly due to massive inflows from foreign institutional investors (FII).

FIIs made net equity purchases of an incredible Rs 21,143 crore in March. That was instrumental in pushing the Nifty and Sensex up by an amazing 13 per cent from the lows of the Budget session. Interestingly, domestic institutional investors sold heavily, with Rs 16,891 crore in net March sales.

Despite that March spurt, fiscal 2015-16 ends with the Nifty down by nine per cent year-on-year. One can only hope that 2016-17 will be better. However, news from around the world hasn't changed for the better, in tenor or tempo.

Federal Reserve Chairperson Janet Yellen continues to advocate caution. She is worried about a global slowdown. Traders are relieved that the Fed is less likely to hike in 2016. US payroll data indicates that jobs were still being created at a decent pace in March and America continues to see some gross domestic product (GDP) expansion.

But China is in slowdown and periodic shocks can be expected from there. Europe is on the edge of recession and Japan is already in recession by some indicators. Deflation is a threat across the First World, given soft fuel prices and generally low demand.

India has problems on the external front. But those will be masked, so long as crude and gas prices stay down. The trade deficit and the current account deficit are narrowing. But trade exports, including non-oil exports have fallen for the last 16 months. Services exports are flat and NRI remittances are down, due to hard times in the Gulf.

Lower remittances and FII outflows have been compensated to a great extent by strong foreign direct investment inflows. However, recent "clarifications" about policy in the key e-commerce sector could put a brake on sentiment. The new regulations are more restrictive and a throwback to the licence raj.

On the corporate front, Tata Steel's efforts to flog its UK business appear sensible. But it may take a while to exit that disastrous venture. Meanwhile, the domestic cement industry is seeing consolidation with Ultratech taking over some of Jaypee's assets.

Auto sales in 2015-16 were good in patches. Maruti has seen a jump in market share and four-wheelers have seen seven per cent year-on-year growth in unit sales. There has also been an apparent pick-up in commercial vehicle sales in the second half. However, two-wheeler sales have been flat, with three to four per cent growth. Rural distress has hurt two-wheelers and tractors as well. This fiscal could be hard going for some segments, what with the new infra cess and the Supreme Court's ban on registration of large diesel cars in the National Capital Region.

On the macroeconomic front, activity in eight core industries saw a pick-up in February, with a 5.7 per cent rise. This could drive the Index of Industrial Production (IIP) since this set contributes 38 per cent of the IIP weight.

The induction of four new securities in the Nifty and the removal of three will probably have a positive effect on the index. The new inductions made a weak debut. But Aurobindo Pharma, Bharti Infratel, Eicher Motors and Tata Motors Ltd (DVR) will, at the very least, be bought by exchange-traded funds and index funds. Meanwhile, Cairn India, Punjab National Bank and Vedanta will see selling pressure. The induction of two securities from one company, Tata Motors, is unprecedented.

Investor sentiment could be affected to some extent by political events. Assembly elections kick off today in West Bengal (six phases) and Assam (two phases). Perceptions about likely results could contribute to volatility on the exchanges.

Technically speaking, the rally continues. But momentum has eased. A big rate cut may provide new impetus. A move past the 200-Day Moving Average (which is around Nifty 7,900) would be a very positive signal. But there will is a lot of selling pressure between 7,750-7,900. It will take plenty of buying to overcome resistance at that band.


Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel