<b>Devangshu Datta:</b> A lot hinges on the Indo-Pak situation

Market trends for a while will depend on how the two countries negotiate ties. If that heads towards normal, Nifty might even hit 9,000

Geopolitics trumped economic considerations in the last fortnight. Indian markets tanked on the news of strikes at terrorist launch pads across the Line of Control. The guarantee of heightened tensions between two nuclear states may trigger more volatility.

Global markets got a boost, however, from the first US presidential debate, which was comprehensively won by Hillary Clinton. There are two more debates to come. Though Clinton leads this tightly-contested election, Donald Trump certainly can't be written off. Markets will be on tenterhooks until the poll results come through in November.

One interesting development is the agreement by the Organization of Petroleum Exporting Countries (OPEC) to cut crude supply for the first time in eight years. For once, Iran and Saudi Arabia seemed to have come to an agreement. Iran will be exempt from production cuts, but overall OPEC production may drop 750,000 barrels a day. Crude prices jumped and gas and coal also rose. Analysts say that the cutback could lead to crude prices firming by another $10/barrel. This is good for Oil and Natural Gas Corporation, Oil India Limited and Cairn but not for the rest of the Indian economy.

On the domestic front, spectrum auctions have got underway. At base prices, this will raise Rs 5.66 trillion (Rs 5.66 lakh crore) if all the 2,355 MHz offered across seven wavelengths (all 4G capable) is sold. That's over twice the 2015-16 revenues of Rs 2.5 trillion for the entire telecom service industry. The industry is consolidating with RCom, merging with Aircel and having a "virtual merger" with Jio. Most operators have massive debt burdens. Vodafone is bringing Rs 47,700 crore in as foreign direct investment.

Sale of the entire spectrum is unlikely. The 700 MHz wavelength is, by far, the most expensive; a pan-India 5 MHz block is priced at Rs 57,425 crore, while the entire 700 MHz chunk on offer is priced at over Rs 4 trillion. Only Jio has submitted enough earnest money to bid for 700 MHz. Jio, Airtel and RCom hold pan-India 4G spectrum. Idea and Vodafone may bid strongly to expand respective 4G footprints.

Muted responses to the spectrum auction would directly impact Budget estimates. Estimated revenues from telecom (which includes prior spectrum fees, etc) is about Rs 99,000 crore. However, the government should be quite happy with responses to the income disclosure scheme, which has pulled over Rs 65,000 crore into the white economy. This boosts tax collections considerably.

Reserve Bank of India (RBI) Governor Urjit Patel's first policy review on Tuesday will be watched with interest. The consensus is the RBI will maintain status quo but optimists hope for rate cuts. The new Monetary Policy Committee is also an unknown quantity and the policy statement will be parsed carefully, regardless of what the central bank decides to do (or not do).

Inflation seems to be moderating as food prices drop after a decent monsoon. At the same time, unemployment is supposedly up, and manufacturing is slow. So there's a good argument for cutting rates. There's also an argument for letting the rupee slide, which rate cuts may encourage, in the hopes of improving export competitiveness. But there could be pressure on the rupee anyway as the FCNR swap reversal continues.

Given status quo policies in September from the US Federal Reserve, the European Central Bank and the Bank of Japan, it's likely that the RBI will wait until December. By then, the next US president will be known; the Fed may hike (or not); and the RBI will also have an idea of the combined impact of the monsoon, of festive season consumption and the likely inflationary impact of the Pay Commission bonanza.

There are a few other data points worth noting. Foreign portfolio investors (FPI) brought in over Rs 20,000 crore in September, split almost equally between equity and debt. Increase in debt exposure implies that FPIs are expecting a rate cut (or sustained RBI Open Market Operations to push down yields) that will lead to capital gains on the debt portfolio. Meanwhile, the Securities and Exchange Board of India has allowed the use of commodity options. This could lead to more volumes and trading interest in the commodity segment.

The ICICI Pru issue saw a fair degree of interest. It listed at a discount but that was at least partly due to the crash caused by the surgical strike. The Bayer-Monsanto deal has meant a mandatory open offer for Monsanto India, which has pushed up the latter's price.

The technical situation looks interesting. FPIs are positive and domestic institutions were also net equity buyers in September. Mutual funds have received strong inflows, although less than 30 per cent of AUM is in equity funds. Direct retail attitude also seems to be positive in general.

The surgical strike triggered a crash that pulled the Nifty down to a key support around 8,600.

If that breaks, the index could easily drop till 8,400. The Nifty has not recovered but smallcaps and midcaps have, indicating that retail is more optimistic than institutions. News flow would obviously be critical to defining the trend since traders fear escalation of the Indo-Pakistan situation. If things don't heat up on that front, a bounce till 8,950-9,000 is likely.