The stock market is likely to open on a steady note this week, but with a negative bias ahead of the Reserve Bank of India meet.

The RBI is meeting on March 19 to decide on interest rate amidst wide expectation from market participants that it will reduce key rates by 25 basis points, despite challenging economic conditions. There is less room for aggressive policy rate cuts due to stiff inflation and widening current account and fiscal deficits.

StanChart expects a 25 bps reduction in the repo rate to 7.5 per cent . “In our view, a combination of a narrower February trade deficit, adherence to the fiscal deficit target in FY-13, a pronounced slowdown in GDP growth to decade-low levels, and a fall in core inflation to below 4 per cent year-on-year for the first time since April 2010, will provide the RBI with enough space to reduce repo rates at its next meeting,” it added.

If the RBI cuts rates as expected, then the market may see only momentary gains, but that may not sustain for long, given the weak undertone at Dalal Street. On the contrary, if RBI maintains a status-quo stance, then benchmarks will continue the downward slide. In that event, stocks from rate-sensitive sectors such as realty, auto, banking and capital goods, will lead the downslide.

The US Federal Open Market Committee’s two-day meet on March 19 and 20 will also be keenly watched. Though it is expected to hold the key rates at a record low level, minutes of the meeting will be on focus. In the last meeting, some members raised concerns on the impact of easy liquidity. Some members of the Fed had said the current programme of asset purchases could be distorting and even harm financial markets.

The US Fed Governor Jeremy C. Stein recently warned that there are already signs of investors starting to take bigger risks, as evidenced by yields in the corporate junk bond markets which are relatively low by historical standards.

While the Dow Jones Industrial Average recorded a new high last week, S&P is almost close to its earlier peak.

However, former Federal Reserve Chairman Alan Greenspan said even with record-high stock prices, investors don’t need to worry about “irrational exuberance” this time. According to him, stocks are still “significantly undervalued.”

Marketmen are also watching political developments. Hardening its stand, key UPA ally DMK slammed the Centre for its ‘lukewarm’ response on the Sri Lankan Tamils issue, and threatened to walk out of the ruling alliance if it fails to move amendments to the US-sponsored resolution at the UNHRC.

Any adverse development on this front will impact the sentiment further.

>badrinarayanan.ks@thehindu.co.in

Related Topics
comment COMMENT NOW