D-Street loses sheen as rate hikes start to bite

The deadlock over the means to resolve the Greek debt crisisand actions of the US Federal Reserve ( UScounterpart of the Reserve Bank of India) on Tuesday hold the key tothe movements of the global and the Indian markets in the short term. Butexpectations on the future course of inflation and RBI actions are likely tohaunt the domestic market in the coming weeks, if not months.

The positive signals emanating from the euro zone financeministers' meeting helped the Indian market shrug off the policy rate hikes byRBI on Friday, and end the week in positive territory. But the same meet endingin a deadlock adds to the uncertainly of the already volatile market in thecoming week.

Expectations are being built over the announcement of thethird tranche of quantitative easing (QE- III) by the US Fed when it meets onTuesday and Wednesday, to prop up the US economy. There is a possibilityof Bernanke, the US Fed chief disappointing the markets again as he did acouple of occasions in the past.

On the domestic front, economic slowdown is expected toaccelerate, with higher lending rates pulling down demand for goods andservices further. RBI has already made it clear that as long as inflation is atelevated levels, it would have to continue with policy rate hikes.

Inflation measured by the wholesale price index ( WPI) forAugust was at 9.78 per cent, nearly double the RBI comfort zone of four to 4.5per cent. The main challenges for bringing down inflation include the recenthike in petrol prices and the fall in the value of the rupee, both of which addto high inflation concerns.

Economists are also perplexed by the course of inflation.They expected inflation to start moderating in July 2011. The currentexpectation is that it would start moderating only in December.

"The immediate impact of the hike will be felt by theconsumers as banks gear up to pass on the impact of the hike in their cost offunds, to consumers. Commercial, auto, home loans and corporate loans willbecome dearer," said Abizer Diwanji, head of financial services and executivedirector of global consulting firm, KPMG. High bank lending rates have alreadyaffected the capital investment cycle, rendering many projects unviable atthese high lending rates. Those who have borrowed at floating rates have seentheir interest commitments multiplying.

"Further lending rate hikes are likely to moderate thealready slowing trend in credit demand. But more than that, the key concern forthe banking sector would be the increase in asset quality risks," said VaibhavAgrawal, vice- president (research), Angel Broking.

This year so far, the Indian markets have underperformed (down-22 per cent) vis-a-vis the emerging markets (EMs)(down  -10.3 per cent), opening up arelative underperformance gap which is the highest in the past 10 years.

" Earnings trajectory, meanwhile, continues to deteriorate. TheRBI's tight money policy has started dampening demand even though its fullimpact has not yet been played out," said Diwanji of KPMG. The formation oflower high and lower low on the weekly chart remains alarming with Niftystrength faltering as it remains near 5,177 levels. "Hence, a clear positivetrend is likely to occur on a close of above 5,200 in the near term," said AmarAmbani, research head- PCG, IIFL.

Courtesy: Mail Today