How to play the market from here

What a week it was! The government, from being in deep coma for months, went into a full battle-ready reform mode.

Post the hike in diesel prices and the cap on the number of subsidized LPG cylinders, the government eased FDI norms in four sectors. While the moves help specific sectors, like the ailing airlines may now be able to get the much-need funds and the cash-starved retailers may now attract investments, the more important task is does is to lift the overall mood of the economy.

But first things first: Is there a chance that these moves might be rolled back? One can never be sure. The ministers, on their part, are sounding more confident as against their earlier failed attempts to bring in some of these initiatives.

Let us take the most contentious initiative - FDI in multi-brand retail. The government has okayed the reform measure with a big change. It is now up to each state to decide whether it wants to allow FDI in multi-brand retail or not. The argument is that while some states are open to the reform, others are not. So, it was best to give a go-ahead at the Cabinet level and then let the states take the final call. No better way of getting around the problem! It can be expected that the Trinamool Congress and other allies will fall in line eventually. So, can't expect major rollbacks.

Now let's get to the stock market. By all accounts, it's been a September to remember as far as the intervention of central banks around the world is concerned. Taken together, the back-to-back actions of the European Central Bank and the US Federal Reserve have been more than impressive. How effective the central bank actions will turn out to be in the long run is a different question. For now, let's focus on the near to medium term scenario. Unlike QE2, QE3 is an open-ended programme. QE2 was immediately followed by stronger risk appetite - stronger stock/oil prices, higher interest rates and a strong dollar. As far as QE3 is concerned, thanks to the recently heightened expectations for stabilization of the euro zone economy it would be fair to expect the third round of quantitative easing to result in a stronger risk appetite but a weak US dollar. A weaker dollar has implications for all risk assets. The even bigger worry however is potentially higher commodity prices. Remember, oil prices have remained higher than during QE2.

Back home, thankfully, the Indian stock market has more upside. So, how does one play this rally? Well, key beneficiaries of the FDI are Pantaloon, Shoppers Stop, Jet Airways and SpiceJet. Talking about the broader market, this could potentially turn out to be a mean reverting rally. Surely, a repeat of December 2011-January 2012 cannot be ruled out.

What the RBI did on Monday? Well, logic dictated that the central bank should have done nothing. But, frankly, it was a tough call. Oil prices have an upside risk due to QE, global metal prices are already 20 per cent off their lows and the hike in diesel price is expected to add 100-120 basis points to local inflation numbers. Given this, the RBI was within its right to sit tight. But then, it did a fine balancing act by keeping the policy rates unchanged and cutting the CRR by 25 basis points. Had it gone for the popular demand, it could have risked damaging its credentials as an independent central bank that won't budge under pressure.

The larger point, however, is that if the government stays the course, the RBI should feel right about easing rates in a few months.

Bottom line: The stock market looks poised to extend gains from last week. So, enjoy it while it lasts!