Market watch | Rate cuts deferred
There was a cash reserve ratio hike, but the market no longer regards that as a hardening rate signal, rather a liquidity adjustment mechanism, writes Udyan Mukherjee.india Updated: Jun 07, 2012 17:05 IST
There was not much in the monetary policy for the stock market, either way. Yes, there was a cash reserve ratio hike, but the market no longer regards that as a hardening rate signal, rather a liquidity adjustment mechanism. Even so, while rates will not go up, their decline will be arrested for the time being. This was reflected in the way automobile stocks sold off on Tuesday, as interest rates need to come down there to boost sagging volume growth. The equity market is now working on the premise that the interest rate cycle has peaked and it is only a matter of time before the Reserve Bank of India starts cutting rates. While the policy was not exactly dovish, there was not much there to warrant a change in that premise.
The RBI's repeated mention of capital flows is probably an indicator that more controls are on their way, to prevent the rupee from appreciating. It is difficult to predict what shape these controls will take, but this seems to taking over as priority for the government.
Tuesday's slip in stock prices had little to do with the monetary policy. After such a spectacular run culminating in the Sensex crossing a psychologically important level like 20,000 a certain amount of profit booking is only to be expected. A bit more of the same would be perfectly fine too. The US Fed meeting could now be the decider in determining whether we pull back some more or carry on rallying after this mild pause. A 50 basis point cut would spark off a big rally, no cut would probably induce a fall, what would be interesting to see is how global markets respond if the expected 25 basis point cut is delivered. The screen is not suggesting a U-turn just yet but let us wait and watch.