THE PHENOMENAL RISE OF THE MARKETS
By Ruma Dubey
The phenomenal rise of the markets today has left everyone totally stunned. The BSE has galloped over 500 points and the NSE surged over 150 points. BSE and Nifty ended at highest level since January 2011. Bank Nifty is at 30-month high. The BSE Realty index is up over 4% and the BSE auto Index is up almost 3%, the highest rise since 22nd Jan’13.
Bank stocks, which were beaten down to pulp till a few days ago, in fact last week too, due to growing worries on asset quality deterioration are today the toast of the day. HDFC, ICICI, HDFC Bank, ITC, RIL, L&T are all big gainers. Scores of stocks have hit a 52-week high and prominent amongst them, contributing directly to the rise in the markets have been HDFC Bank, Maruti, IPCA Labs, Lupin, MRF, RComm, Zee Ent, Kotak Mahindra Bank, HDFC.
On Monday, the picture was looking very bleak. The trade deficit for April burgeoned to over US$17 billion from around US$14 billion (YoY). Gold imports rose 138%. The market that day decided to ignore the fall in retail inflation at 9.39% for April v/s 10.39% in March and food inflation fell from 12.42% to 10.61%. It instead concentrated on the trade deficit numbers and the BSE tanked over 400 points.
Yesterday, the WPI numbers had come in at 4.89%, lowest since Nov’12. The markets did not react much to that. But the impetus was given by the RBI Governor Subbarao. He mentioned that he was very happy that the inflation had come down, more than what was expected and that RBI made note of this fall. He also said that he remained worried about retail inflation which remained high and also that current account deficit needs to be brought down from current 5% t0 2.5%.
Markets largely chose to ignore the latter part of the statement and concentrated on the ‘very happy’ aspect. It started celebrating a rate cut .
Just as the market on Monday over reacted, today also, it went bonkers! Let us assume RBI cuts rates – will it be 100 bps or 50 bps? It surely cannot be just 25 bps, given the massive rise in the Sensex today. So then the question is – can RBI afford to cut rates, at this juncture, before monsoon, by 100 bps or 50 bps?
A rise in the market never hurts but what will hurt are high expectations. Here, the market is now expecting a major rate cut and if that does not come through, there will be major disappointment, meaning a major fall.
A rise which is based on pure assumptions and hypothecations is like a candle in the wind, do not know which gale of wind will blow off the light. Today the same things which had looked dim two days ago, look extremely bright.
It is best to exercise extreme caution at this juncture. When a person is highly emotional, he says and does things which defy all good sense. Ditto for the markets. It is riding high on sheer sentiments as the ground reality remains the same. The market wants RBI to do what the Govt is not doing – push growth. Or rather, it knows that it cannot expect much from the Govt and has thus pinned all hopes on the RBI.
There is more than a month for the RBI meet. Next mid-quarter review of Monetary Policy for 2013-14 will be announced on June 17, 2013 and the First Quarter Review of Monetary Policy for 2013-14 is scheduled for July 30, 2013. But the more immediate numbers we will now await is on 30th May - quarterly GDP estimate for Q4FY13. And before the RBI meets, the April IIP numbers will come on 12th June.
More significantly, watch out for the Indian Meteorological Department’s (IMD) monsoon watch estimates in the next couple of days. That will, to a large extent will show us the entire picture of the economy ahead. If monsoon plays hookey, be assured these inflation figures will vanish into thin air and so will all hopes.
PS: Congress launched its Rs.180 crore ad blitzkerg on ‘Bharat Nirman’ with an eye on the polls. Looks like the market is celebrating that too?