Here's lookin' at you, Guv

Sep 26, 2015, 07:42 IST | Arun Kejriwal

Ahead of Tuesday review meet, RBI chief Raghuram Rajan sets ball rolling by warning captains of industry: cutting rates not be all and end all of issues faced by economy

One bad day at the markets in the week was enough to see losses of about 1.36 per cent on the BSESENSEX and 1.42 per cent on the Nifty. There was a four day trading week with yesterday being a holiday on account of a religious festival. Thursday was the expiry day for September series and the same saw a loss of 80.45 points or 1.01 per cent.

Raghuram Rajan will be the man from whom there are many expectations as the RBI review looms next week. Pic/PTI
Raghuram Rajan will be the man from whom there are many expectations as the RBI review looms next week. Pic/PTI

The week ahead would largely be driven by what Raghuram Rajan, the Reserve Bank of India (RBI) Governor does on Tuesday. He has set the ball rolling by warning captains of industry that cutting rates is not the be all and end all of issues being faced by the economy.

So strong was his message that the Finance Minister and his deputy both stopped demanding a rate cut and left the timing to the better judgment of the Governor. The other important event is that the US markets have also been in turmoil after the Federal Reserve’s decision to keep rates unchanged at its meeting was not taken well by global markets.

The fact that US has been rattled by China’s devaluation and slowdown is a well-known fact and all that has been achieved is the deferment of the rate increase by six weeks or at best twelve weeks. The rates have to be increased sooner or later.

Similarly, in India a rate cut is also imminent and the market believes that a 25 basis point cut is certain. If this happens the markets would take it in their stride and after some positive moves would discount the same. God forbid if it does not happen, the markets would take a beating.

Let us become more optimistic and assume that a 50 basis point cut happens then the markets could simply zoom and regain substantial lost ground. Besides, the rate cut no change is expected in SLR (Statutory Liquid Ratio) which has been steadily brought down in a phased manner.

To sum it up, there are three possibilities in front of the RBI. 1) A rate cut of 25 basis points. 2) A 50 basis points cut and 3) Keep rates unchanged. I would like to put my money on the first option and am quite hopeful of the same.

Any effect on account of the RBI’s action would be a short term effect as corporate performance has to improve significantly going forward. Though there are some visible signs that the worst is behind us changes in corporate performance would begin to show probably from the October-December quarter performance only. In such a scenario one needs to be patient and wait for actual results before jumping the gun.

The week ahead would be driven by what Rajan does on Tuesday and the commentary thereafter. Besides this, global cues would continue to drive markets in India. Trade cautiously in the next week which has just four trading days like this week, with Friday being a holiday on account of Gandhi Jayanti.

Arun Kejriwal is founder of the Mumbai-based advisory firm Kejriwal Research & Investment Services Pvt Ltd. Readers are invited to read more about these and other issues on his website

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