Equities may remain positive, thanks to RBI

Monday, November 3, 2008

Equity market is likely to respond positively this week to RBI’s moves on the weekend. The sentimental value of these moves may leave short-term impression on Dalal Street. Last week, we wrote in these columns that those who expected RBI to give stronger signal for reversal in interest rate cycle have to wait. The central bank did not keep them in waiting for long.
The RBI not only paved the way for more liquidity into the financial system, but also signalled lowering of rates.Market had begun to turn last week on expectation of regulators’ steps.
The measures may ease pressure on some banks, mutual funds, NBFCs, real estate players and corporates in the short-term. There is a likelihood that in a trickle-down effect liquidity situation and confidence level would improve for the equity market too. More importantly, improvement in equity valuations may set in motion a virtuous cycle for the financial system, even if for a short term.
Some scepticism Overseas institutional investors are still troubled by problems in their own backyard. Investors across the world, after almost concerted efforts by majority of central banks in October to release more liquidity and reduce rates, wonder if these measures will be sufficient to stabilise the financial systems and prevent economic depression. Throughout last month they mopped up money from markets including India.
Three things have emerged in the melee – authorities are likely to use available means to address the problems as they crop up; investors would like to wait for clearer indication of depth of the oncoming global recession and identify economies that might be less impacted; and since a strong element uncertainty shrouds the unfolding developments none would like to take fresh moves in a hurry.
Interim relief In India monetary and regulatory actions may bring about an interim relief for the market. More of such actions cannot be ruled out in the near future through unconventional mode also. Some market players are expecting good news on capital gains tax front.
Would the Government announce a new package of fiscal stimulus for infrastructure or would it cater to political demands for “aam admi” before elections? Can the Government, which is in a policy bind to balance growth with containing inflation, arrest growth impairment in the third and fourth quarters? If global depression were unavoidable, how India would fare?
Investors would be looking for answers to these questions in pricing in a medium term outlook for equities.


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