Indian markets likely to be volatile this week: India Ratings

Indian markets are likely to be volatile this week as two central banks will announce their monetary policies, said India Ratings and Research in a press release on Monday.

Both the Bank of Japan (BoJ) and the US Federal Reserve are scheduled to review their monetary policies on Wednesday.

According to India Ratings and Research, the US Federal Reserve is unlikely to hike rates in this week’s policy, but may signal imminent rate normalisation in the near-term.

However, the Fed may signal confidence in the underlying recovery with explicit communication to prepare financial markets for the potential rate action before the end of 2016.

The recent spate of data releases (growth and inflation numbers) may encourage the US Fed to take the opportunity and prepare ground for a potential rate action in the near future, cited the ratings agency. 

The monetary policy decision of Bank of Japan (BoJ) will come against the background of ongoing negative rates and quantitative easing programme conundrum. Even though the bank has maintained an ultra-easy policy programme, both growth and inflation have remained elusive, while the yen has retained strength, it said.

The ratings agency has stated that policy alternatives over the future course of action will keep the global markets circumspect ahead of the announcements.

The latest retail inflation and industrial output data is apt for the debt market in India.

“Domestic economic conditions augur well for the debt market; the fall in retail inflation coupled with weak industrial recovery accentuates the need for undertaking growth boosting measures,” India Ratings said.

India Ratings has said that  the bond market movement in the near-term will be a function of outcomes of the Fed and BoJ policies, as risk appetite will remain a major determinant of yields. 

On the rupee front, the ratings agency said, “A status quo decision coupled with hawkish rhetoric from the US Fed is likely to weigh down risk appetite, and the rupee be pushed on the defensive.”

“Additionally, with upcoming $26 billion FCNR B (foreign currency non-resident) redemption, the rupee is poised to withstand any imminent volatility better than the previous episodes as strong forex reserve accretion ($371.3 billion) gives the Reserve Bank of India (RBI) the cushion to manoeuvre and anchor rupee movement,” it further said.