 "<b>Devangshu Datta:</b> The market at RBI's beck and call")
The first circumstance - lower crude prices - is obviously favourable for India. It should go a long way towards easing fears of either the fiscal deficit or the current account deficit (CAD) spiralling out of control. The fisc has hit 89.6 per cent of the full-fiscal 2014-15 target. That's higher than the 84 per cent of target it had hit by this stage in 2013-14.The CAD also expanded in October.
Changes in gold prices could impact the value of Indian household savings and perhaps the CAD, given the age-old fascination for metal. October saw legal gold imports jump to over $4.2 billion (about 150 tonnes by weight). This is a big rise year-on-year compared to October 2013, when legal gold imports were at $1.1 billion (about 24 tonnes by weight).
The government has also removed the 80:20 import restriction (wherein 20 per cent of imports had to be re-exported). Removal of this constraint could mean higher imports. However, if the value of gold falls (assuming the Swiss vote is as expected), some household savings may also be switched out of gold and into financial assets.
The trade deficit widened in October, as exports dipped and imports grew. There is a chance that the rupee could have gained strength versus other currencies although the rupee fell below 62/$ in late November, despite foreign institutional investors (FIIs) buying net Rs 10,000 crore of equity.
The yen is at multi-year lows versus the dollar. The Chinese have just cut rates after two years. They are threatening to loosen money supply by cutting reserve ratio requirements. The euro continues to be in trouble, though Germany is generating better numbers now.
The RBI decision on policy rates will really depend as much on its perception of the external situation and where it wants exchange rates, as it will on domestic growth and inflation expectations. The domestic numbers are mostly on the positive side of the expectations.
The RBI has, therefore, made its January 2016 inflation target of six per cent Consumer Price Index, some 13 months ahead of schedule. This is primarily due to the crash in crude prices. The central government will have to cut back expenditure since it must try to make the fiscal deficit target. This will slow down growth but it is also likely to push inflation down further.
On the external front, if imports are expanding and exports compressing, there will be mild worries about the CAD. The RBI also has to think about the flood of dollars coming in with every round of FII buying. This will tend to push the rupee up.
The central bank may buy dollars to push the rupee down if it wants to stimulate exports. Or, it could cut policy rates and let the rupee settle downwards. If it thinks the rupee needs to weaken, there is just a chance that RBI will cut rates now. However, the consensus is still in favour of a status quo until the Budget.
Apart from policy rates, RBI's pronouncements on giving banks some leeway in restructuring loans will also be keenly awaited. The RBI governor hinted that there might be some measures in store aimed at restarting stalled infrastructure projects.
Apart from bank policy, India traders will watch shenanigans in Parliament in the hopes that some reform Bills can pass. There will also be some speculation based on the Jharkhand and Jammu & Kashmir Assembly elections. Stake sales in public sector undertaking banks are another potential area of speculation.
Technically speaking, the stock market continues to be in an extended uptrend. The Bank Nifty and other financial stocks are outperforming the overall market. The RBI policy could send the market into orbit if there is a rate cut. If there isn't, the bull run may continue anyhow but with interim corrections.