Not much fuss over rate hikes

Tue, 20 Apr Closing

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Although the markets did go down post the announcement of RBI's monetary policy, it still managed to end the day comfortably in the positive. While the BSE Sensex closed higher by around 60 points (up 0.3%), NSE Nifty closed with gains of around 25 points (up 0.5%). BSE Midcap and Small cap indices fared even better, edging higher by more than 1% each. On the Sensex, two stocks gained for every one that declined.

Asia closed mostly in the green today while Europe has also opened on a strong note. The rupee was seen trading at Rs 44.5 to the dollar at the time of writing.

First, it was the Goldman fiasco that threatened a small degree of correction. Although the markets did tumble yesterday, they came out pretty strongly today, indicating that the entire episode was but a small blip. And now, even the RBI rate hike is looking like it may not have a major impact on the markets. All these are pretty bullish signals for the near term movement of the markets. Looks like the uptrend will continue for some time. While this may look good in the short term, we would set up ourselves for a prolonged medium term pain if the trend persists. For higher the markets go in the near term and the more they move out of whack with fundamentals, the bigger the fall is likely to be. We may not have to go a long way back to illustrate the same with a real life example. Hence, caution remains the buzzword as far as we are concerned.

Another factor that must have enthused markets is RBI's bullish undertones with respect to economic growth. For FY11, the central bank has pegged India's GDP growth at an impressive 8%. This, even as the bank goes about its business of hiking interest rates. The central bank feels that India's exports have been growing and with the industrial sector recovery also being broad based, there is no reason to assume that India will grow at below 8% in the current fiscal. Besides, the corporate sector has also recorded an improved profitability, which is reflective of the improved performance of the industrial sector, the RBI is believed to have said.

L&T, the private sector engineering behemoth ended in the positive on the bourses today. As per the company's senior management, the company is looking at bidding for airport projects in West Asia. If successful, this could open up yet another front for the company in terms of growing its revenues, especially at a time when its order book is already very healthy. Nonetheless, the company sees this as an extension of its core activity and hence, the interest. It should be noted that such projects are normally in the range of US$ 1 bn to US$ 1.2 bn and L&T is not the only Indian company that will be looking to do this. Companies like GMR Group have already undertaken a similar development work in the past.