Stock market hopes for rate cuts, more reforms

Implementations of key reforms, cut in interest rates, overhaul of tax regime and a stable global economy are some of the wishes that Dalal Street expects to come true in the new year beginning Tuesday.

Despite volatile moves, the year 2012 has finally proved to be fruitful for the stock market with about 25 per cent appreciation in benchmark indices, but investors are looking forward to more stable times in 2013.

The wish-list includes favourable policy initiatives by the government and regulators like Reserve Bank of India and Securities and Exchange Board of India, in addition to implementation of already proposed reforms, as also a better corporate earnings performance in 2013 to keep up the momentum, experts say.

"RBI's monetary policy looks as the biggest trigger for the Indian stock market in 2013. Going ahead, implementation of the proposed Direct Cash Transfer, if happens on the desired lines, would lift investor sentiment.

"Also, the much-awaited GST could be a game-changer for the markets," Aditya Trading Solutions Managing Director Vikas Jain said.

Indian investors, craving for rate cuts, would also like to see inflation slowing, he added.

The central bank had hiked key policy rates 13 times by 3.75 per cent between March 2010 and October 2011 to tame rising inflation.

The RBI has, however, indicated that in view of the likelihood of inflation moderating further, it could go in for a rate cut in its third quarter policy review in January.

Besides, market participants also wish that government continues its reforms' measures and presents a realistic and reformist budget.

The gain of over 25 per cent in Sensex in 2012 so far, has infused life back into the markets.

However, going ahead, the rally will be driven by corporate earnings, fiscal deficit and inflation-level,

Jain said.

According to Vinay Khattar, Head Research (Individual Clients), Edelweiss Financial Services: "The first and foremost wish is from the RBI.

"Markets are expecting the central bank to cut repo rate in the fourth quarter of FY13.

"The second wish is that government must implement the proposed reforms, such as increasing foreign direct investment in insurance and allowing foreign play in pension industry, besides clearing the decks for introduction of goods and services tax."

If inflation continues its downward trend, RBI may opt for rate cut in January, experts say.

On rate cut expectations, Khattar said, although, RBI has refrained from cutting rates for quite a while, it is likely to resume rate cuts in the last quarter of FY13.

The timing and size of rate cuts is still debatable given RBI's preference for price control. On the whole, RBI is expected to lower repo rate by 50 basis points in the remainder of FY13, Khattar said.

Marketmen have expressed optimism on the outlook for the Indian market.

"We see 13-15 per cent upside in Indian equities. This translates into Sensex target of 22,000-22,500 over the next 12 months," Khattar said.

The government's reform agenda has lifted investor sentiment and business confidence, which in turn have driven overseas investment inflow.

The bellwether bluechip index Sensex has gained about 25 per cent so far this year. The total foreign fund inflow for 2012 stands at over $23 billion.

The biggest reform the government should unleash in 2013 is on the fiscal deficit front, analysts said.

"Globally, the biggest risk stems from the US fiscal cliff uncertainty. Some sort of a compromise is expected before the end of 2012. However, as of now there is no clarity," Khattar said.

Further, economic indicators need to show improvement on a consistent basis to boost investor confidence in the European markets, experts said.