Will Reserve Bank of India's monetary policy surprise the market?

The capital markets expect the Reserve Bank of India (RBI) to keep interest rates unchanged on Tuesday, August 5, when it reviews monetary policy. Any positive surprises will be a big trigger for the markets, but with inflation, especially food inflation, at uncomfortable levels, the central bank has little room for any easing. The rupee slipping below 61 to a dollar will also restrain the RBI from cutting rates. The fiscal deficit crossing 56 per cent of the annual target in the first three months of 2014/15 will also weigh on the RBI's mind.

The rupee will be the biggest worrying factor for the central bank. If one looks at the last 10 years, the rupee has shown huge weakness against the dollar as well as its Asian peers. For instance, compared to the Thai baht the rupee has depreciated nearly 80 to 90 per cent during this period. Interestingly, Thailand has seen two major coups in the past 10 years.

On the other hand, lack of triggers in the domestic market coupled with global weakness, especially slowdown in Europe and the Ukraine crisis, will lead to some weakness in the Indian equity market. Till the foreign flows are positive no one was worried about domestic or global factors. But flows are slowing down after foreign inflow of $5 billion in July. The tension between Israel and Palestine is also becoming a reason for players to adopt a sell-off position in the market. Investors globally are becoming risk averse and it will also impact local markets. In between if the US increases rates before the middle of 2015 it will also be a huge dampener for markets across the globe, including India, as this would see an outflow of money moving towards the US.

But investors in India should not be bothered about such weaknesses in the market. There isn't any immediate trigger for the equity market but it is by far a safe haven among its emerging market peers. India is among the only big emerging economy to have escaped a cut in the IMF's update of its world economic outlook. The IMF has retained its forecast of 5.4 per cent growth in Indian economy in 2015 and a stronger 6.4 per cent growth the following year. Indian is not a runaway market but it is a market to construct a strong portfolio for building long-term wealth. Any correction that takes place should be taken as an opportunity to buy stocks. In fact, a correction is healthy for the Indian market after a sharp 32 per cent rise in the last six months with the Sensex gaining from 20,000 to 26,000 levels.

On Tuesday, the market will also keep an eye on HSBC Services PMI for India for July. For June, the HSBC Services Business Activity Index edged up to a 17-month high of 54.4 from 50.2 in May. Also, this week the government will table the insurance bill for clearance in Parliament. Some big companies like Hero Honda, Mahindra & Mahindra and State Bank of India will also declare their April-June quarterly results during the week.