Holding inflation is the key priority

New Reserve Bank of India (RBI) Governor Raghuram Rajan’s repo rate hike by 25 basis points may have evoked bearish sentiments but in some ways he has maintained the stance of his predecessor Duvvuri Subbarao by not making any distinction between the different inflation sources.

Rajan too is focusing on bringing down headline inflation, which is critical for inflation expectations. Also, there is no change of stance on the role of monetary policy to support growth by him either.

In this context, Standard Chartered’s Global Research pointed out that the near-term obstacles to growth are not in the domain of monetary policy.

With this, the new governor shares the view that monetary policy can only support growth in the medium-term by ensuring low and stable inflation, it added.

The Economic Alert by StanChart said bringing down inflation by reducing demand-side pressures when supply constraints are acute is likely to prolong the slow-growth period.
However, a substantial decline in CPI inflation and inflation expectations might reduce demand for gold.

In turn, this could address current account vulnerability and encourage financial savings, it said, adding, “...agreed that inflation is still a concern in the economy but the effectiveness of using interest rates to address food and fuel inflation is open to question.”

Even as sentiments ran high on D-Street after the US Fed baulked at tapering the flow of easy money into the system; was it then a bubble waiting to be broken? True, someday the tapering will happen. RBI Governor Rajan at his media briefing made it amply clear that “The US Fed decision was only a postponement and it should be taken as that only.”

Meanwhile, he continued, during this postponement, India should gear up to face the eventuality.

The right direction

The bears may be rejoicing over the crash that the markets saw on Friday, and some analysts may be reading that the party is over on Dalal Street, but overall the benchmark indices — Sensex and Nifty — have ended the week with handsome gains. Nifty is above 6,000, with a gain of about 160 points, and the Sensex is above 20,000.

According to Angel Broking’s Shardul Kulkarni, “Let us beware that the averages hide more than what they reveal. While the Nifty may be at a shouting distance of a new all-time high, the situation on the ground is far worse. Raghuram’s focus on inflation and currency management strategies may have disappointed the street, but they sure seem to be steps in the right direction.”

Even after taking out the points that were added due to the US Fed’s ‘no taper’ move, he said, “We have Sensex and Nifty sitting pretty. If nothing, the slight hawkish stance taken by the new RBI governor may have done the act of a reality check in a euphoric market built by the stance taken by the US Fed, because technical evidence gives a bearish outlook. “Technically speaking, we are sensing a reversal of the bullish trend seen over the last four weeks,” he added.

Even US markets seem headed for a downfall, which would likely impact the domestic market. “The charts of the Dow and the S&P present an interesting scenario. On the weekly chart, both indices show strong negative divergence on the RSI momentum oscillator. Considering the overall price pattern and wave structure, we expect a 5-8 per cent correction in these indices in the coming three weeks. This is also likely to have an impact on Indian equities,” he added.

Adding to this bearish sentiment is the outlook on rupee, which is said to have a big impact in the bearish trend that the markets witnessed last month.