US Fed lets party go on

There is a good chance of US equities witnessing strong buying after trading with a slight downtrend over the past month. If the US rally is sustained over the next few weeks, the Indian equity market will touch an all time high. But over the next six months, one expects a healthy consolidation and expects the Nifty to trade between 8200-8600

Janet Yellen gave a classic US Federal Reserve talk when she addressed a press conference after a globally-awaited meeting of the policy committee on Wednesday. "Just because we removed the word patient from our statement doesn’t mean we will be impatient," the chairwoman said.While signaling confidence in the economic recovery, and inflation climbing back up to 2 percent target in the long run, Yellen gave no clear signal about the timing of the first rate hike since 2008.Looking at the price action in US equities and 10-year yields, coupled with the steep sell-off in the US Dollar, the best guess would be: A June hike is off the table.

As of the impact on India, the structural bull market is intact but requires patience. There has been a huge outflow of funds out of the US into Europe in the first quarter of 2015. According to analytics major EPFR Global, there has been a record $33.6 billion outflow from US equities and $35.6 billion inflow into European equities. There is a good chance of US equities witnessing strong buying after trading with a slight downtrend over the past month. If the US rally is sustained over the next few weeks, the Indian equity market will touch an all time high. But over the next six months, one expects a healthy consolidation and expects the Nifty to trade between 8200-8600.

But the Reserve Bank of India (RBI) Governor Raghuram Rajan must ease the monetary policy faster than consensus. The annual retail inflation, based on consumer price index (CPI) was 5.4 percent in February and the consensus view is that it will consistently undershoot RBI’s 6-percent target through 2015 and average 5 percent in 2-15-16 financial year, according to Citibank. While monsoon is a risk factor to these forecasts, the softer inflation readings should continue on account of lower commodity prices, moderate minimum support price (MSP) hikes and a deceleration in rural wages. Growth figures are nowhere close to flattering given the equity valuations the markets are commanding.

Industrial production continued to expand at a moderate pace of 2.6 percent year-on-year in January as compared to a revised growth of 3.2 percent the previous month. On a sectoral basis, mining and consumer goods output contracted by 2 percent and 1.9 percent respectively in January while electricity and manufacturing output rose by a meager 2.5 percent and 2.8 percent respectively. The ongoing economic reforms and de-bottlenecking of investments will, of course, add to the growth rate in the coming quarters, but this must be accompanied by a large fall in the cost of capital.

But are we asking the right questions? The market is asking whether the US economy can handle a 25 basis points increase in interest rates. That to one's mind is really an insignificant question, because it clearly can. Historically speaking, we will most likely see a 2-3 percent drop in equity prices post the hike decision but that dip will be bought into.One can argue whether Yellen was hawkish or dovish in her press conference. But referring to equity valuations being "not outside of historical ranges", she certainly doesn’t want the market to turn bearish. Not as yet.

By Vatsal Srivastava