All eyes on US as it addresses fiscal deficit

This week the stock market is likely to witness volatile trading pattern as the US is yet to fix the fiscal deficit programme. Next week is a truncated trading week as the market will remain closed on Tuesday on account of Christmas.

Politicians in Washington failed to reach an agreement to deal with $600 billion in tax hikes and spending cuts due to kick in early next year. Economists forecast that this “fiscal cliff” will push the economy into recession.

Besides, the impending expiry of December contracts on Thursday in the derivative segment will also flare up volatility as traders roll over their positions to the January series.

Market-wide rollovers into January series stands at about 30 per cent, slightly higher than the average rollovers for the last three series.

Volumes are likely to be low next week as most overseas markets will be closed for Christmas. .

Last week, the Reserve Bank of India kept key rates unchanged in its monetary policy review. Despite strong demands from industry and the bankers, the RBI left the short-term lending (repo) rate and the cash reserve ratio unchanged at eight per cent and 4.25 per cent respectively, but reiterated its promise of a rate cut in the January-March quarter to prop up growth.

This gave an air of optimism that the RBI may reduce interest rates in the next monetary policy on January 29.

“We now expect the RBI to signal a decisive change in the direction of policy in Jan-13 with a 50 bps rate cut. This would be followed by another 50 bps cut in remaining CY13. We also expect a 25 bps cut in CRR in Jan-13 policy to help the liquidity situation further,” said Motilal Oswal.

But global financial research firm Nomura has a different take. “Space for rate cuts remains very limited because of the persistence of the large twin deficits (fiscal and current account) and sticky inflation.

“Rate cuts in H1 [first half] 2013 should not be interpreted as the start of an aggressive rate easing cycle. Until consumption moderates which is currently supported by rising rural wages, minimum support price hikes and firm house prices, inflation will remain sticky,” it said.

“While the Government will show fiscal consolidation on paper in FY-14, we don’t believe this will be achieved due to sticky consumption expenditure and lower tax buoyancy.

“The structural fiscal deficit will remain large and, more likely, the Government will rely on asset sales (disinvestment, land monetisation, telecom spectrum auctions) to plug the revenue hole,” said Nomura in its 2013 outlook in India.

Despite these worries, undertone still remains bullish in the market.

Brokers are betting on a pre-Budget rally, on hopes of some tax sops for corporates, particularly for the export segment, which has been hit by slowdown in the developed nations.

According to market participants, further reforms, rate cut by central bank and results for December quarter will act as catalysts for the markets till the Budget is presented.

(This article was published on December 23, 2012)
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