With two key events behind us, the FOMC meeting having global implications and RBI meeting having domestic implications, the focus this week will shift to the derivative expiry on Thursday, FII inflows, rupee and expectations on quarterly results with Q3FY14 earnings season to start from second week of January.
For the short term, politics will be key focus as the parliamentary elections are just five months away. The Election Commission has already stated that the new government will have to be formed before June 1, 2014.
Summarising the effect of both the key events, the FOMC meeting and the RBI meeting, in few words, they both had dovish connotations and are likely to support the equity markets.
A strong US economy will also lend support to emerging economies as exporters tend to gain. As the US dollar is expected to gain, the resultant depreciation of the domestic currency will also help exporters. In terms of the index Nifty, exporters comprise of some 40 percent of Nifty by weight.
Combine this with about another 15 percent, which is dependent on the buoyant rural economy, nearly 55 percent of the Nifty by weight is expected to remain stable, which would lend strong support to the markets.
Expectations are that the QE will be completely done away by October 2014 and on the interest rates, the Fed futures indicate a rise in interest rates only by September 2015.
The RBI has been very astute by adopting a wait-and-watch policy on inflation because vegetable prices have actually cooled sharply and are getting transmitted to retail gradually.
The recent stand by RBI is somehow giving us a strong feeling that the interest rates are peaking out especially due to expected future data on the inflation front. Also, the sticky food inflation cannot be resolved through monetary policy initiatives but rather by government initiatives on improving the supply chain and removing rural supply infrastructure bottlenecks.
The year-end will impact both the rupee as importers' demand for the US dollar increases at the month end and as FIIs will be in the holiday season till mid-January leading to possible slowdown in inflows. FII outflow in future, if it happens, will get accelerated only in case bond yields in US rise sharply and quickly – this is the only fear.
Nifty entered the December series with comparative higher rollovers (72.75 percent vs 63.29 percent three-month average) along with a healthy cost of 0.93 percent vs 0.58 percent.
The expiry will be more skewed towards the upside as the past trend in the rollover is expected to continue, given the two fundamental events, the FOMC and RBI meeting, playing out with a positive connotation.
The article is contributed by Aviral Gupta, Mynte Advisors.
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