What can drive markets higher in March?
Indian financial markets are looking forward to better growth rates in fiscal 2012-13 with growth driven by easing policy stance by the RBI and liquidity generated by central bank easing across the globe.
The Indian government will table the union budget for 2012-12 in the parliament on the 16th of March. Markets will look to see if fiscal deficit is brought down from expected levels of 5.6% for 2011-12. Markets will also watch out for any reforms in subsidies.
RBI will release its policy review on the 15th of March. RBI is expected to cut CRR (Cash Reserve Ratio) in its policy review given tight liquidity conditions, which is seeing banks borrowing record amounts of Rs 180,000 crores from the RBI repo window. Inflation printing at 6.55% for the month of January 2012 from levels of 7.47% seen in December 2011 and levels of 9% and above seen for most of calendar year 2011 is positive for policy easing. Repo rate cut can be expected if oil prices do not overshoot levels of USD 125/bbl. significantly. CRR cut and repo rate cut will add to the positive sentiments prevailing in the financial markets.
Economic data coming out of US, Japan, China and the Eurozone will drive global equity markets. Japan and Korea saw industrial production numbers printing higher for the month of January leading to a more positive outlook on these economies. China cut its bank reserve ratio in February on the back of a worry of slowdown in exports due to weakness in the Eurozone economy and markets will expect further easing by China to spur the economy forward.
The ECB (European Central Bank) conducted its second funding operation on the 29th of February, where it lent funds to European Bank for three years at 1%. The second round of the LTRO (Longer Term Refinancing Operation) saw banks borrowing Euro 529.5 billion from the ECB. The first round of LTRO held in December 2011, saw banks borrowing Euro 489 billion from the ECB. The central bank has not given a date for a third round of funding. ECB has added over Euro one trillion of liquidity since December 2011, and this liquidity is finding its way into risk assets. However if the ECB stops the funding facility markets will have to look elsewhere for liquidity.
Markets are going positive into March 2012
Equity markets are going into the month of March on a positive note with month on month gains across global indices. The Japanese Index the Nikkei 225 gained the most in February with over 10% gains on the back of a weakening Yen. The Japanese Yen fell over 2% against the US Dollar (USD) on the back of higher quantum of bond purchases announced by the central bank in reaction to a contracting in the economy in the third quarter of 2011.
Markets exhibited classical symptoms of carry tradeswith a falling Yen, falling USD and strengthening Euro and strengthening emerging market currencies including the Indian Rupee (INR) leading to rise in equity and commodity prices. The Reuters commodity index, which tracks a basket of 19 commodities, rose over 3% over the month of February and oil prices rose close to 10%. Oil prices rose in sympathy to the geo political tensions in Iran though strong equity markets helped start the rally.
Indian equities and the INR gained over the month of February 2012. FII flows crossed over USD 4.5 billion in February as “carry trades” encouraged portfolio flows into emerging markets. Equities gained despite weak IIP (Index of Industrial Production) growth numbers of December 2011. IIP growth fell to 1.8% in December 2011 from 5.9% growth seen in November 2011. India’s third quarter GDP growth for 2011-12 came in at 6.1%, below market expectations of 6.4% and below growth rates of 6.9% and 7.7% seen in the second and first quarters respectively.
Indian government bond yields fell 10bps in February on the back of lower inflation expectations and on the back of RBI government bond buying. RBI bought Rs 30,000 crores of government bonds in February through OMO (Open Market Operations) bond purchase auctions. Bond markets will watch for February inflation numbers and track oil prices to gauge further direction of bond yields.