<b>Devangshu Datta:</b> When central bankers become newsmakers

While the RBI and the Swiss National Bank made some surprising moves, the European Central Bank announced the details of its QE plan

In the 1960s, British Prime Minister Harold Wilson referred bitterly to "gnomes of Zürich", self-effacing bankers whose currency manipulations could make or break the global economy, even though they never featured in the news. Bankers have become far more visible and a bunch of central bankers were newsmakers through the last fortnight.

The Reserve Bank of India (RBI) made a surprising policy rate cut, which almost coincided in timing with similar 'surprising' rate cuts from the Danes and the Canadians. Indian stocks zoomed to new levels, in a rally that continues on strong buying from foreign institutional investors. The Nifty has moved up by 6.7 per cent in the last 10 sessions.

Then, the Swiss National Bank freed the franc from a currency peg it had held with the euro in another unexpected move. The franc promptly hardened a lot, before settling down at stronger levels.

The markets had barely digested this news when the European Central Bank (ECB) announced the details of its new quantitative easing (QE) plan. The ECB has put together a larger QE than anybody expected. It will buy euro 60 billion of bonds every month from across the region between March 2015-September 2016. The euro promptly crashed to an 11-year low while European stocks jumped to seven-year highs. Further currency gyrations could occur if Greece does exit the single currency.

The dollar has hardened to worrying levels against the euro and the yen. There could be a technical snap back in these currency pairs. Even otherwise, the US Federal Reserve must consider its best course of action. US gross domestic product (GDP) growth seems reasonably strong - much stronger than Europe, or Japan, at any rate. Does the Fed hike policy rates (as US macro-indicators may indicate) or does it hold, and if so, when should it act and by how much?

Meanwhile, in Asia, China announced that GDP growth continued to slow. The People's Bank of China has started carrying out open market operations to improve liquidity. There are credible rumours that it could cut reserve requirements. It has already cut rates and there are currency implications since the currency peg with the dollar cannot easily remain undisturbed if China cuts both policy rates and reserve requirements.

There are also rumours that Malaysia, which relies heavily on natural gas and oil exports, could see its currency, the ringgit, coming under pressure as its current account goes into serious deficit. This has terrifying implications for those who remember the Asian Flu of 1997-98. Oil prices also fluctuated wildly after the death of King Abdullah of Saudi Arabia, even though his successor pledged not to change policy.

In all, it was an interesting fortnight. The immediate implications for Indian stock markets seem to be positive. There will be a flood of excess liquidity seeking returns out of the Euro zone, to add to the continuing QE out of Japan. Some of that money should come into Indian stocks, though the safety-conscious will probably head into US Treasuries. In technical terms, any momentum or trend-following system indicates that Indian equities should continue the bull run.

The RBI is almost certainly braced to cut rates through the next fiscal though it will presumably need to adjust expectations, given central bank action across the world. Forex reserves are at record levels so, it can manage any necessary interventions. The rupee has hardened in fact, against every major currency, and export competitiveness could be a source of worry. This makes it easier to contemplate rate cuts, which should create some downwards pressure on the rupee.

Too much is being made of Indian GDP growth rates accelerating past China in 2016-17. This International Monetary Fund prediction is based on an assumption of drastic Chinese slowdown, as much as it is based on assumptions of Indian acceleration. But it does imply that 'The Fund' believes India will be able to carry out a substantial improvement in GDP growth rates, even if the global economy remains downbeat.

From here until the last working day of February, the focus will be on the Budget and the preceding parliamentary sessions. (US President Barack Obama's visit could provide a positive impetus to sentiment). Investors would ideally, like sundry ordinances with economic implications to be ratified and passed into law. They would also like a Budget, which somehow creates stimulus while cutting deficits. They would like to see progress on the Goods and Services Tax front. Quite a few investors are likely to take their cues from the RBI. If Raghuram Rajan responds with more rate cuts, the market will keep climbing.