Will upcoming RBI policy meet change the mood at Dalal Street?

Modi magic saw 2014 becoming a great year for Indian stock markets, with the benchmark Sensex flaunting a prestigious tag of world’s second best major performing market. However, the mood at the Dalal Street Bulls seems to have dampened in recent sessions with foreign investors in pullback mode amidst the fury over the Minimum Alternate Tax (MAT).

Falling from a life-time high of over 30K in early March, the Sensex rally has lost steam, while volatility has heightened as tepid March corporate earnings numbers renewed skepticism over Asia’s third biggest economy, while stalled progress over two key bills pending in the Parliament i.e. Goods and Services Tax & the controversial Land Acquisition Reform have also tired investor appetite. The depreciation of the Rupee against its US counterpart, and forecasts of a below-par monsoon haven’t helped Dalal Street’s cause either. Spooked by concerns that the government will impose a 20 per cent MAT on capital gains over the past seven years, overseas investors seem to be in exit mode, keeping the Sensex below 28K.

The see-saw ride in the market has left the investors wary about the direction of Sensex. The much awaited interest rate cut by the RBI at its upcoming policy meet on June 2, 2015 can serve as a much needed mood lifter for Indian markets, with a 25 bps reduction on the cards amidst softening inflation. Consumer inflation, the RBI’s main inflation gauge, fell to a four-month low of 4.87 per cent in April 2015, remaining well below the 6 per cent goal for January 2016, while the government contained its fiscal gap for 2014-15 at 4 per cent of GDP, below the 4.1 per cent budget target, leaving ample scope for a third rate cut this year.

Moreover, the rupee has stabilized while foreign investors have been given immediate relief over MAT recovery with a government –appointed committee looking into the matter. Investors will eye progress over the GST and the Land Acquisition Bill which have been sent to a joint parliamentary panel for review after running into heavy resistance from opposition parties and allies, and are now likely to be passed in the Monsoon Session.

A timely monsoon would be a boon for the Indian economy and help bolster rural demand while keeping inflation under check. A slowing US economy has also pushed back bets of a rate hike, meaning that a flush of global liquidity owing to the Fed’s zero interest rate policy stance and record QE in Europe and Japan will continue to find its way into Indian markets.

Robust progress on structural reforms including easier tax norms and further interest rate cuts could power the Sensex back to 30,000 in the next few months.