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WPI no seen at 9.5%; to leave RBI uncomfortable: Udayan
September, 14th 2011

It was not a bad overnight scenario for global markets. A decent recovery was seen in the US and Europe. The eurozone has now become the epicenter of the world, wildly swinging between hope and despair everyday, says CNBC-TV18s managing editor Udayan Mukherjee. Until things stabilize, he sees no point in taking a call on the future direction of these markets.

For now, it is best to hope for some intermittent bouts of relief for global markets. Just for the context of this morning, we might get a little bit of a fillip. So our market should open stable today, according to him. With the WPI numbers coming in today, Mukherjee says the number may not surprise the market as there is consensus that it will come in around 9.5%. It wont be a great number, especially, before the credit policy meet, making it more uncomfortable for the RBI, he adds.

Below is a verbatim transcript of his comments. Watch the accompanying video for more.

Q: It is still a bit of a live by the day situation. Everyday you hear new solutions being proposed especially for the European region?

A: Its totally a live by the day situation. European markets are swinging wildly between hope and despair when they think that things are looking bad and Greece is going down and Italy may fall then the market may selloff 3-4% and they are on random talk of conference calls between ministers and Chinese bailouts etc. You see markets moving back. This is a very edgy kind of market out there. You cannot extrapolate one days action to what will happen the next day. We live in that kind of a world right now where everybody is running very scared, reacting very quickly to every bit of incremental news which is coming into the system.

Its quite pointless to talk about any kind of directional trend right now for global markets. Things have to stabilise. In todays conference call between Merkel and Sarkozy, if they can find some kind of an interim solution for the Greek bond problem, I dont know whether it goes away permanently from the horizon and something else will crop up. The best you can hope for is intermittent bouts of relief for global markets where you will see those 8-10% kinds of rallies and then the bad news will come back. Its a difficult situation and its likely to remain that way with possibilities of small relief rallies like what you saw 10 days back. You could see those things cropping up again.

Q: The more important macro numbers are due out today even though everyone is expecting 9.5% plus kind of inflation?

A: I dont think the numbers will surprise today because there is almost consensus in what the number should be. We are likely to get an inflation number, where you could get a few basis points here and there but it will almost certainly be a 9.5% plus number. Now whether its 9.6% or 9.7% is splitting hair but it will be not a great number coming as it does two days before the policy. This will probably not be an IIP like number where you just falloff your chair when you look at that number, it will probably be a fairly high number and not comfortable territory for the Reserve Bank at all.

What is interesting and amusing are the kinds of pressure which is coming in from New Delhi through the media over the last few days exhorting the Reserve Bank to pause and sit on its hands for a while which is quite amusing because people who are exhorting the RBI not to act have made a fine example of not acting over the last couple of years.

This is probably the reason the RBI finds it has the unpopular job of having to persist with the monetary policy action. There is a lot of popular chorus about making the RBI the villain right now and the sole one responsible for all of Indias problems but the truth could not be further away from it. The villain sits in New Delhi. They are the ones who are now trying to exhort some pressure on the RBI to cover up for their complete lack of action over the last couple of years. Its an interesting situation that we will see on Friday as to whether the central bank buckles under pressure.

Q: What about the index because its been facing consistent pressure again around that psychological 5,000 mark?

A: Its going nowhere. Yesterday, we made an attempt in the morning, went up to 5,030. The first signs of trouble in Europe saw us coming dashing back to 4,930 and give up 100 points so effortlessly. You could say that the Nifty is tossing very fitfully between that 4,900 to 5,100 kind of levels and you are likely to see more of the same over the next couple of days. This morning we may inch up higher, the shorts are also skittish so they take positions for a day. The next morning when Europe opens up in the green they start covering up their shorts and they lay on more shorts whenever the weakness returns in global markets.

You are seeing a lot of frenetic near-term trading activity in the futures market, intraday volumes are quite large these days but neither the bulls nor the bears have any kind of conviction. At the first signs of things moving against their trade, they cover up longs or shorts. Its like a storm in a tea cup, in a very narrow range you are seeing that intense volatility and therefore the India VIX is refusing to cool down but I dont think we have a trend out here.

If 4,900 breaks decisively on the way down then it opens up the gate for a retest of 4,700 once again. On the upside, you have seen that if the Nifty manages to get passed 5,000, that 5,200 zone represents stiff resistance and no signs yet from the screen that the Nifty is ready to take out those kinds of levels immediately.

Q: What about flows?

A: Half a billion dollars have gone out month to date. September has not had a great start and now everybody is beginning to look at the dollar index very closely once again. In the past, we have had periods where the market has been very fixated on the currency market. It was the yen a few years back, more recently it was the dollar index and on that all the trades would get pegged and now it is coming back to the dollar index once again where people are increasingly trying to map what happens with flows.

They are using the dollar as the barometer of what is going on. The rupee has caused a lot of consternation over the last few day and we have seen such tepid inflows or outflows from the Indian market too. This is not the time to get obsessed with options strike prices and say 5,100 call is being written or 4,700 put is being written.

Those are just near-term tactics from traders. You want to keep your eye on the bigger game of what is going on with the currency market because that will tell you which way the wind is blowing and which way the market has to establish the near-term trading trend.

Q: A Merrill Lynch investors survey was out yesterday and we are still one of the least preferred markets. The weightage issue may change around a little bit. Yesterday someone was making the point that no one is interested in India right now because there is no guarantee of performance here?

A: Correct and if you look at the reason for it, if you talk to some investors overseas they will tell you give me three reasons to buy India right now aside of valuations which you have been telling me for the last many months. You scratch your head and thats the problem with India right now. If you are a diehard India bull then you will put a positive spin on anything which is negative but barring valuations which in many cases indeed are very attractive but that by itself is never a trigger enough for a lot of investors to get into the game.

It is always a very important thing but as in the past, that is not the compelling reason for people to get in. For everything else policy is dead, there is nothing which is going on there, inflation is high, everybody is talking about interest rates having peaked off but they are very high and high enough to cause a lot of discomfort, earnings growth is tepid and crude remains at USD 112-113 per bbl.

People sitting outside are telling themselves the world is in a bit of a tizzy. Is there a compelling reason for me to put a lot of money to work in India? The answer there probably of coming up with this no. Therefore, whenever India does very badly, immediately after that you see some tactical money coming in as you saw in August and then the market moves up 8-10% quickly and global investors take their hand off the table.

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