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Continuity in US leadership means no policy uncertainties

It’s crisis time for the global economy and obviously a change in political leadership in the largest economy of the world during this crisis period will generate uncertainty on the way forward.

It’s crisis time for the global economy and obviously a change in political leadership in the largest economy of the world during this crisis period will generate uncertainty on the way forward.

The global markets have taken this ?no-change stance? as positive into the near term while there is no guarantee that the US economy will get out of its ?fiscal crisis? soon to set up a long-term bullish outlook on global markets.

The impact on Indian economy and markets is positive. The continuation of QE3 and other liquidity infusion and growth supportive measures in the US is seen to boost India?s exports.

Investors? shift into the ?risk-on? mode will drive liquidity into Indian debt and equity capital markets. The weak US dollar, near-zero interest rate regime and liquidity over-hang are the main factors that would support Indian asset markets.

Overall, external cues have turned positive for India?s equity and exchange rate markets. While this will arrest bearish set-up on rupee and equity, the bullish cues have to emerge internally.

The expectations on growth and inflation continue to remain weak; monetary dynamics exert downward pressure on growth while fiscal dynamics exert upward pressure on inflation.

This conflict of play in growth-inflation dynamics has generated conflict of interest between the government and the RBI.

At this stage, it is mixed signals for rupee and equity market with good tailwinds from external sector and strong headwinds from domestic sector. The trending in headline WPI inflation into 7% will be watched closely to enable RBI to turn growth supportive and ?walk? in the same direction along with the government. It would be consolidation phase in the near term with Nifty expected to outperform rupee. Nifty has formed a strong short-term base at 5630-5580 with immediate target at 5830-5980. The outlook for rupee is mixed in the near term while there is greater comfort for rupee bull phase into medium/long term.

The rupee has already given up more than 50% of its recent gains from 57.32 to 51.35. The expectation into the near term is for consolidation at 53.20-54.80 not ruling out extended gains into 52.50 on rate cut signals from RBI.

The writer is head of Alco and Economic and Market Research, IndusInd Bank, Mumbai

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First published on: 08-11-2012 at 02:53 IST
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