How much easier it would have been for traders if Federal Reserve Chairman Ben Bernanke was the governor of the Reserve Bank of India. Given market conditions, one could then have safely played for a rate cut and got it right. Of course, the management of the economy would have been a right mess but that’s a different matter. Sadly, there are no sure bets with the good Dr Reddy, he's very much his own person, utterly uninfluenced by market expectations.
So today, there maybe a surprise or two. Having been disappointed in the past, it’s best not to go in expecting goodies and have a strategy in place to play the interest rate sensitives from here on. My own sense is that, whether he cuts this time or not, rates will start easing soon, perhaps by mid 2008. It's simply a matter of time. The Fed will cut more going forward and that will weigh more and more on the RBI’s mind. The Indian economy is already slowing down and if the rise in asset and commodity prices are reined in by a global downturn, the case for rate easing only becomes stronger.
So, if for some reason the RBI does not deliver a cut and rate senstives sell off today, it could be an opportunity. PSU bank stocks have already come off 20-30 per cent from their recent peaks and some of their overownership driven froth has been skimmed off. Banks are the best rate sensitives. Real estate is the higher beta one, ie they will give you sharper trading swings depending on the news but they run a valuation risk which banks don't. It’s true though that real estate stocks have corrected 25-50 per cent in the last fortnight. If rates do indeed come off, these stocks may give you a good trading bounce but those trading profits then need to be channelised into the safer banking sector. Autos have already seen some accumulation and perhaps at their valuation levels, there is a defensive quality about them as well. They aren't the best rate sensitives but one can build a case for a 20 per cent upside in many auto stocks in 2008.
I wouldn't get too worried if the RBI didn’t move today. The central bank is the best judge of monetary policy, at least in this country. We are in a tough global environment, the RBI’s eye needs to be on the woods, not the trees. Targetting policy action to please the market is a dumb thing to do; it suits the Yanks, not us.