N Sundaresha Subramanian

Mumbai: The Federal Reserve on Wednesday announced its seventh consecutive cut in the funds rate as a part of its continuing efforts to prop up the sub-prime hit US economy.

Four out of the previous six cuts have seen a positive response from the Sensex.

But if the response around the globe is any indication, when the market reopens on Friday, expect no fireworks.

Deepak Mohoni, managing director, trendwatchindia. com, says, “It looks neutral. There’s not much impact. Even the statements made by Fed were not much of a surprise.”

The wall of liquidity seen after the first Fed cut on September 18, has not been replicated since.

The 50 bps cut then from 5.25% to 4.75% brought in copious foreign institutional flows hoisting the Sensex from 16000 levels to 20000 within a month.

Subsequent P-note regulations have made flow of hot money in to the Indian shares difficult so Fed cuts have not been as significant. Hitesh Agrawal, head of research at Angel Broking, says even in the previous Fed cuts India has not received much money.

“We were falling then. But in the last one month, we have seen some buying. The latest Fed move needs to be seen in the context of domestic concerns. The cut comes on the back of an RBI move to hike the cash reserve ratio.”

The effects of this rate hike, though not seen immediately, will be felt by banks as and when they come into effect.

“Only then will the banks be in a position to gauge the impact accurately,” said Agrawal.

Experts said the reaction of the banks need to be watched closely. If they start to increase rates, then the corporates would not like it. Many companies have lined up expansion plans. If their cost of borrowing goes up, their plans would be hit.

The RBI projects credit growth at 20%. But if interest rates go up, things may slow down, feel experts. Mohoni feels the magnitude of the next downward move of the market will give an indication about its strength.

“The market looks quite promising at the moment. A number of stocks are now above their 3-month and 6-month highs.We will get a better picture when there is a decline. The rally is promising, but the decline will be the verdict. If it’s a mild decline, we can be convinced that we are in a bull market. If the decline is deeper then the rally we have just seen could be what they call a sucker rally.”

If the decline is short and if it’s a bull market, then the reasoning for this bull market would be that the recession is going to be a short one, not as deep as anticipated before, he adds.

Both the Sensex and the Nifty have broken above their 200 daily moving average during this week.

Mohoni feels the 200 DMA is more an effect than a cause.

“If you are in a bull market, you will cross the 200 DMA and it’s not the other way round. One cannot say because we have crossed the 200 DMA, we are in a bull market. One should see if the market stays above that level for long,” he says.

Source : DNA