What should the markets look for in December 2011?
There could be Christmas cheer for Indian markets if global and domestic factors play out positively. Markets go into the end of calendar year 2011 with apprehensions on many fronts. On the global side the Eurozone debt issue will continue to occupy a large space in the markets mind. The expected weakness in global economic growth due to Eurozone debt issues is likely to induce central banks in emerging economies to ease monetary policy. Lower interest rates in emerging economies could negate the ill effects of the Eurozone debt crisis and provide relief to markets.
On the domestic front, the markets will expect the RBI to put a stop to rate hikes. The RBI will review the annual monetary policy for 2011-12 in the middle of December. Expected fall in inflation and global and domestic growth concerns are likely to prompt the RBI to hold on to policy rates. Indications of status quo on rate hikes and expected fall in inflation could give relief to the markets, which have been battered and bruised over the last one year.
Will the Eurozone debt crisis be contained?
The EU (European Union) leaders are still grappling with the debt crisis in the Eurozone. The spread of the crisis to Italy has caused a big turmoil in markets as Italy paid over 7% rates for issuing fresh debt. Italian bond yields have gone up by almost 250bps since the crisis hit the markets hard in August 2011. The EU leaders are talking of a larger role of the IMF (International Monetary Fund) in solving the debt crisis. The size of the bailout fund the EFSF (European Financial Stability Facility) is also likely to be shored up to prevent the debt crisis from spreading into other large economies such as Spain. The role of the ECB (European Central Bank) is yet to be fully determined in containing the crisis, but if ECB does get involved and play a larger role, it will be very positive for markets.
Rate cuts by central banks across economies
Central banks from Brazil to Indonesia are looking to ward off growth fears rather than inflation fears. Emerging economies were hit hard by inflation in the last one and half years, with inflation ruling at multiyear highs across economies. Central banks in the BRIC (Brazil, Russia, India, China) have all raised rated over the last one and half years to ward off inflationary pressures. However, the tide seems to be turning with growth rather than inflation taking centre stage. Brazil, Indonesia, Russia and Thailand have seen rate cuts over the last few months by their respective central banks on the back of Eurozone debt fears bringing down growth expectations. China’s central bank cut reserve requirements for banks in order to ease liquidity. Rate cuts by central banks in emerging economies could lead to improving sentiments in the markets.
RBI will maintain policy rates in December
The RBI had indicated in its last policy review in October 2011 that it is likely to maintain policy rates in the next few policy reviews. The RBI had hiked the benchmark repo rate by 25bps in October 2011, taking the total hike to 375bps over a twenty month period. RBI believes that inflation that is ruling at 9.7% levels (as of October 2011) is likely to trend down to 7% levels by March 2011. Economic data will support RBI if it decides to maintain policy rates. IIP (Index of Industrial Production) growth for the month of September 2011 was at 1.9% against 6.1% seen in September 2010. IIP growth for the April-September 2011 period has come off to 5% against a growth rate of 7.8% seen in the same period last year.
GDP growth for the second quarter of fiscal 2011-12 came in at 6.9% against a growth rate of 7.7% in the first quarter and a growth rate of 8.8% in the same period last year. GDP growth estimates for 2011-12, has been revised from 8% to 7.6% by the RBI and all macro indicators are pointing to GDP growth coming below 7.5% levels. Credit growth on a year on year basis has slowed from over 22% levels to 18.5% levels over the last seven months. Global growth forecasts have been reduced by 30bps for 2011 and 50bps for 2012 by the IMF due to debt worries across nations. A slowdown in global growth will hit India’s trade as well as capital flows leading to domestic growth slowdown.