Paul Noronha

Party time: Stock dealers delighted as the BSE benchmark index Sensex crossed the 16,000-mark in Mumbai -

The ‘Bernanke Put’ finally arrived last week. However, impact of it on the Indian economy, stock market and the monetary, even the fiscal policy stances, is dramatically different from ‘Greenspan Put’ in 1998.

In the short term, it is obvious that FII inflow is likely to grow substantially as they would love to reduce shorts and cover on Dalal Street. Overseas liquidity would also chase Indian equities for exceptional currency appreciation adjusted returns, amongst the highest in the world. The so-called risks would be under-priced and the assets would tend to be priced above the ‘fair value’, which is again a relative term.

The stock market this week is likely to witness liquidity flowing strongly in. Last week some of the global brokerages and investment bankers were quick to change their strategies and recommendations for their clients in favour of Indian stocks.

But, many on the Street apprehend, the domestic monetary and fiscal authorities may place some curbs on the liquidity inflow from overseas. Negative noises on PNs and sub-accounts, may also queer the pitch. Above all, increase in uncertainty surrounding the domestic politics, could spoil the sentiment in the short term.

But the catch is the domestic monetary and fiscal authorities are ill at ease with the initial impact of the Fed’s easy money policy on the liquidity, inflation, currency and employment fronts here.

After the Fed move, a senior RBI official reiterated the central bank’s concern over excess liquidity in the interconnected global markets and its negative impact.

ADB in its Outlook 2007 update report last week, released before FOMC announcement, said the RBI is unlikely to reduce interest rate in haste as inflation risk persists. Even though the Chinese central bank raised interest rate on September 14 to cool down its stock market, RBI as well as the Finance Ministry may have to look for esoteric alternatives to curb dollar inflows.

The easing of global liquidity is likely to keep crude oil prices at a level that would put additional pressure on the policy makers in maintaining financial stability and a lower inflation levels.

Interestingly, neither RBI intends to guide the market with the future trend of the interest rates, nor does it indicate to curb portfolio investment flow. Its currency market interventions and its investments, in the short term, remain largely conjectural.

Apart from the uncertainty of a changing time, the derivatives contracts expiry is likely to keep the market swinging this week. In the next few weeks, macroeconomics developments, corporate results and politics are likely to keep the stock market busy.

Last week’s external developments may mark the beginning of a new phase for Dalal Street.

Market economists feel that signs of an unfolding global economic order could become more etched out in the medium term, which may suggest rewriting the long-term India story

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