Markets greet new RBI Governor: Strong pullback anticipated

New RBI Governor Dr. Raghuram Rajan took charge at 'Mint Street' on 4th September 2013, and the markets greeted him with a big 'Thumbs Up'. Both the front line equity indices, Sensex and Nifty, jumped by 2% and the Rupee also strengthened by as much from its lows. Dr. Rajan is taking over at the helm of RBI at a time when the economy and the markets are in a severe downturn. It is widely believed by a large cross-section of the market that Dr. Rajan with his IMF experience and the experience of having worked as the Chief Economic Advisor to the Govt., will instill confidence in the shaky Equity and Currency markets.

In his maiden speech Dr. Rajan has under-lined the following agenda:

• Primary agenda of RBI is Monetary stability i.e. to sustain confidence in the value of Rupee
• Removing uncertainty that has characterised recent RBI actions
• Giving a big push to Banking sector reforms: Removing branch licencing restrictions, speedy clearance of new banking licences, focus on addressing 'Non performing assets' of banks
• Initiate short term changes despite the risks involved
• Opening up special window for banks to swap fresh FCNR(B) deposits
• Hike in Bank's current overseas borrowing limits by 50%
• Technology up-dation: Focus on 'Mobile payments' as a game changer

These changes will go a long way in restoring the confidence in 'Monetary policy' of RBI. The markets will await the announcement of the first monetary policy by the new Governor on 20th September. Till then we can expect a smart rally in the equity and currency markets. The Nifty could speed towards my first target of 5700 in a hurry and it may overshoot this target by another 100 points if the going is good. The Rupee could also recover to Rs.60-62/$ in the bargain. But the US (Barack Obama) could play a spoilsport through 'War mongering' which could keep the markets on their tenterhooks. The markets would also eagerly await the statements of Fed chairman Ben Bernanki on 'tapering off of stimulus'. The strong pull back in the equity markets are likely to be led by Banks and other rate sensitive sectors. Investors are advised to book substantial profits around 5700-5800 on the Nifty. This may be your last opportunity for exit before the next downturn.