In the next couple of days, the market participants world over will be focused on the FOMC statement on Fed rates, inflation & growth outlook and guidance for the monetary policy direction in the near term (next 3-6months). The “active” market participants in India, in particular, would be staying awake till late midnight on Wednesday to hear what Fed Chairman Jerome Powell has to say.
The fact that Thursday happens to be the
monthly derivative settlement for July contracts, makes the Fed decision, and
likely reaction in our markets on Thursday morning, even more pertinent for the
derivative traders in India.
Besides the derivative traders, the currency
traders; bond traders and corporate treasury managers who need to actively
manage their Fx exposure, would also staying awake to see how the US Dollar,
EUR and US Treasuries behaves post the FOMC statement and try to assess how Indian
bonds and INR may react in near term.
Our markets may however be relieved to a great
deal if the RBI makes an unscheduled rate decision on Wednesday morning itself,
just like it did on 4 May 2022, preempting the pressure on Indian bonds and INR
post FOMC decision. For records, in his recent statement, the RBI governor has
already spoken about the inevitability of further rate hikes. It would be
better if it is done tomorrow rather than a week later (04 August 2022) when
the MPC of RBI is scheduled to make a statement on monetary policy.
The European Central Bank (ECB), for example,
hiked 50bps last week – their first hike in 11 years- to preempt further slide
in the Euro. ECB hiked despite signs of accelerated slowdown in growth and
rising fiscal pressures on peripheral Europe.
Since the FOMC decision would be known in less
than two days, I do not find any need to speculate on the likely outcome and
the market reaction to that outcome. Nonetheless, it would be appropriate to
say that the market is pregnant with the hope of a unambiguous ‘pause’ signal
from the Fed and consequent weakness in USD and a rather dovish MPC. The
chances of disappointment are therefore marginally higher than the chances of
positive surprise, in my view.
What should be the strategy of an investor
under these circumstances?
In my view, the first thing an investor should
do is to have a good dinner on Wednesday; go to bed early and not watch the
markets, including business newspapers & TV channels and investing handles
on social media, on Thursday.
Second, investors should focus on performance
of the companies in their respective portfolio, rather than bothering too much
about the general impact of global macro developments. They should assess the
ability of the companies in their portfolio to manage the impact of rate and
currency volatility on their respective businesses. The history indicates that
better managed companies in India have managed this volatility very well
without letting it materially impact their performance beyond a couple of
quarters in the worst case.
Third, if the change in global rate and
currency outlook materially alters the investment argument for a company in
their portfolio, they should place a “sell” order for it today itself.
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