Indian markets got a double booster. Firstly the Reserve Bank of India (RBI) did not raise interest rates in the monetary policy statement announced on 18th December 2013. Secondly the US Fed began tapering the stimulus but the global markets have reacted upwards.
Despite the increases in both the Wholesale Price Index (WPI) and Consumer Price Index (CPI) in November, the RBI maintained status quo on policy rates. Markets had already factored in a rate hike of at least 25 bps.
The Fed said it would reduce its monthly purchases of mortgage-backed securities and U.S. Treasuries to $75 billion per month, down from $85 billion, beginning in January 2014. The Fed's decision also can be interpreted, as a sign that the US economy is back on its feet and no longer needs as much stimulus.
The Fed has been buying bonds since 2008 and many investors say the liquidity boost has been the main driver of the bull market in stocks since 2009. The bond-buying program has become so large; it is expected to push the Fed's assets to $4 trillion this week -- money the Fed basically created out of thin air.
For much of 2013, any inkling from Fed Chairman Ben S Bernanke that the central bank would pull back on its stimulus was viewed negatively by investors. Stocks fell, bond yields spiked, and good news turned to bad news as investors feared positive economic data would cause the Fed to reduce its bond purchases sooner rather than later. But for now, the taper hysteria may have subsided.
The taper, when combined with a growing economy, steadily rising interest rates, and tame inflation, will lead to US stocks climbing even higher. Hence this could also divert flows into the US economy and out of other markets including emerging.
In fact, the Fed extended its commitment to keep short-term interest rates "exceptionally low" until either the unemployment rate falls to around 6.5% or the inflation rate exceeds 2.5% a year.
QE was a huge negative for India after the initial euphoria in CY09 died out as higher commodity prices esp. gold and oil (up ~50% and ~100% resp. since the QE started) hurt Indias inflation, fiscal deficit, current account deficit and currency, in general.
As a corollary, a potential QE reversal is good news for Indias macro after the markets react negatively in the initial months of the QE reversal.
Markets typically make short term/intermediate tops or bottoms around crucial events. Only time will tell , whether these two crucial events will trigger similar events
Overall the Indian markets may head higher in sync with other markets and then form some sort of a near term top in a couple of days.
After a correction that may last from 2 weeks to 2 months (and possibly till 5900 Nifty), the India markets could enter a consolidation phase making a base for a big rally starting in mid 2014.
However in case the Nifty breaches 6300 in the next couple of days and stays above that, then the correction could begin after making a double top or a slightly higher top.
Written by Deepak Jasani
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