Two crucial moves on Thursday -- one by the Indian government on diesel price hike and another by the US Fed on interest rates and a new bond buying programme (of mortgaged backed securities – MBS) will have a positive impact on domestic markets when they open for trade on Friday, market experts said.
The US Fed also kept rates unchanged and committed to keep interest rates exceptionally low till mid-2015 (against end-2014 earlier). In the new bond programme, it has committed to buy agency mortgage backed securities (MBS) worth $40 billion a month (roughly $490 billion a year). This move will increase Fed’s holding in long-dated securities by $85 billion a month. Post the Fed announcement, the US markets went up by a little over a percentage point. Gold and silver gained immediately after the Fed decision.
Saurabh Mukherjea, head of equities at Ambit Capital says, “Hike in diesel price is the best bit of positive news that the market has received in the last two years.We expect buying from both foreign and domestic investors and expect the market to move up between 1 per cent and 2 per cent”.
The decision, experts said, would send a signal to rating agencies about the government’s intent to put its house in order. Thus, in a way, the move would also help ease risks of a potential downgrade of India’s sovereign rating.
On Fed’s decision, Manish Sonthalia, VP and Fund Manager, MOSL AMC, said the move indicated more stimulus and liquidity and was positive for the risk assets, which included commodities and emerging markets including India.”
Vikas Khemani, president and head-institutional equities, Edelweiss Financial Services, said the risk aversion will go away. “All asset prices, including equities and commodities, will go up in the short term. However, rise in commodity prices will be structurally negative for India."
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Some market players said it needed to be seen where (which asset class) the liquidity will prefer to move into in the long run. While some of it was likely to flow into riskier assets like emerging markets and commodities, it was also likely that it would flow into MBS or US treasuries. Notably, the Indian as well as global markets have rallied since the start of June led by easing European concern as well as hopes of a QE3.
Experts also said the bullish mood was likely to sustain in the near term as there were hopes that the government would also permit foreign direct investor (FDI) in aviation with an outer chance of the same in multi-brand retail on Friday.
Some also believed that the central bank might further cut rates in its forthcoming meeting on Monday (September 17).