Market may see tapering volumes as year set to end

Both global equities and the US 10-year Treasury note yield remained fairly flat this week. Federal Reserve’s rate setting committee, FOMC, raised rates by quarter-percentage as was widely expected.

India’s inflation series, both Consumer Price Inflation and Wholesale Price Inflation surprised to the upside, and in retrospect Monetary Policy Committee’s caution last week in upping the ante on inflation risks is amply justified.

The US rates announcement came in as expected. The dot-plots for 2018, while retaining the earlier stated three hikes, do not signify the urgency or concern over inflation estimates.  Republican leaders in the house of representatives and the Senate hashed out a compromise tax bill which brings the bill closer to the final passage. Markets may cheer this development in the short run, and a correction is overdue.

Indian markets played hostage to the Gujarat election developments. Indian bonds weakened most in more than 15 months with benchmark 10-year yield testing 7.25%.  Markets do remain irrational for a far longer period.  Higher real rates and stable local currency should  favour continued overseas funds flows.  FPIs have nearly exhauseted their limits to invest in government securities. Some clarity on the state of fiscal slippage will be the trigger to look forward to for the next major moves on rates.

Inflation  and trade balance numbers released last week.  Consumer Prices Inflation increased 4.88% year-on-year in November of 2017, well above market expectations of 4.2%. The base effects could lead to overall CPI inflation overshooting the RBI’s forecast. The combined effect of the sharp rise affecting RBI’s rate setting may nearly extinguish rate-cut hopes and may exert pressure on the merchant bankers for the government to manage yields and costs while raising monies from markets.

Current account deficit in July-September widened to 1.2% of gross domestic product (GDP). However, the deficit looks smaller and better sequentially.

The week will start with election results of Gujarat with some price action on Monday for sure. Bond markets may see tapering interest and reduced volume as calendar year-end and longer weekends set in. For the 10-year yields, 7.25% should remain cap as the prospects of the new benchmark paper getting a 7% handle remain high. Only a break below 6.90% reduces risks of further sell-off.

The writer is a markets expert