RBI To Hike Interest Rates

The Reserve Bank of India is all set to hike interest rates on Oct 4-5, after the conclusion of its 2-day meet. This is largely keeping in mind inflation expectations after a sharp rise in petrol and diesel prices. It is likely that the RBI may hike interest rates again later this year as wel to contain a falling rupee.

The good thing for investors is that now they have a choice of investing in good interest yielding instruments as interest rates have moved higher. This means, while stocks were the only option, now they have fixed deposits as well. For example, highly rated deposits of Mahindra and Bajaj Finance are offering interest rates of as much as 8.45 to 8.75 per cent, with yields that can go as high as 9.5 per cent.

As interest rates move higher, investors will shift from equities to debt.

Political uncertainty

With the key states of Rajasthan, Madhya Pradesh and Chattisgarh going to the polls, markets are likely to remain tense. There are barely eight months for the national elections and the outcome remains uncertain.

It is almost certain that the BJP led NDA government would not get the number of seats that it previously commanded. It is always a difficult to predict election outcome, but, markets are likely to remain volatile. We could see some selling pressure that could emerge, which could lead to erosion of capital. It is hence better to stay on the sidelines at least for sometime.

Rupee and crude will continue to pressure the markets

The rupee is likely to see wild swings as in the past few days. With crude continuing to rise, the rupee could remain under pressure.

We have seen the markets moving in tandem with the rupee for the last few weeks now. Each time the rupee falls against the dollar, the stock markets fall. According to forex observers, we might see a slightly greater fall in the rupee in the coming days, nd a move to Rs 73 looks possible.

This would mean some pressure on the stock markets.

Expensive valuations

Markets are still expensively valued at 23.34 times trailing EPS of Sensex companies. It is always difficult to predict one year forward earnings, since for the last several quarters investors have got it terribly wrong.

In short, it maybe just time to avoid large exposure to the markets at the moment.