Monetary policy, FOMC meeting, F&O expiry to dictate market trend this week

He came, he fought, but failed to conquer. This sums up Arvind Kejriwal and his Aam Aadmi Party (AAP) party's achievement last week after the Delhi chief minister and his party workers went on dharna on the streets of Delhi last week.

It's been three weeks since this column predicted that Arvind Kejriwal's AAP would affect the equity market adversely. Kejriwal's impressive electoral debut had created a flutter not only in political circles but also in the equity market. Many wondered if his national ambitions would end up cutting into the votes of the established political parties in the general elections in May.

But last week's inconsequential drama may well have upset urban voters, who are the main supporters of AAP. Kejriwal's governance deficit is not going to be forgotten easily.
 
This has come as a relief to those closely involved with the market, especially foreign investors. They are betting big on Narendra Modi becoming the next prime minister and had for a while feared Kejriwal could thwart the possibility. No doubt it may be premature to think so, but many feel Modi will push the reform process and drive growth. Nearly 90 per cent of the fund managers surveyed in the fourth Business Today's Morningstar Asset Allocation Survey felt the BJP-led National Democratic Alliance had a good chance of forming the next government at the Centre, and 70 per cent expected the market to rise if the NDA came to power.

But the real question is 'do elections make any difference to the direction of the market?' The answer is no. Though the market is volatile on the day the results are declared, the financial year in which the election was held has always shown a positive trend. Even in 1998, when the election threw up a hung parliament, the Sensex surged 16 per cent.

The equity market has always delivered positive returns irrespective of which party came into power. In the current environment FIIs want a strong and stable government at the centre which will drive reform and bring back growth. Even political parties have realised that people want development and jobs and not doles and they are too fighting the election on development. The biggest proof of doles not giving electoral advantage is the state of Rajasthan where the people threw the incumbent Congress government of Ashok Gehlot - which had generous with doles - to vote in the BJP under Vasundhara Raje.

Meanwhile the coming week will be full of action. To start with, the Reserve Bank of India monetary credit policy review will be announced on Tuesday, January 28. With inflation having come down, the Street expects RBI Governor Raghuram Rajan to maintain the status quo on interest rates. Though the market would have loved it had he cut rates, domestic economic indicators and global events may not allow him to do so. Even so, if he does cut rates, it would be a big positive for the equity market.

The market will also keep a close watch on the two-day meeting of the US's Federal Open Market Committee (FOMC) on Tuesday and Wednesday (January 28 and 29). It is possible the US Fed may increase its tapering - reduce its monthly bond-buying by another $10 billion, which could impact emerging markets adversely. (It has already reduced bond buying by $10 billion from January 1.) A whole lot of December quarter results of blue-chip companies and Sensex heavyweights like Hindustan Unilever, Sesa Sterlite, Maruti Suzuki, NTPC, Bharti Airtel, ICIC Bank and Hero MotoCorp are also expected.  The market may also remain volatile with the January 2014 F&O contracts ending on Thursday, January 30.