By Ruma Dubey

Tomorrow morning the Indian markets will keep a wary eye on RBI. With RBI having already taken steps much before the RBI policy, there is really no suspense or build up of an interest rate cut. It is largely expected to be a non-event.

At this juncture, there really isn’t much that Subbarao can do. This is probably the first time in a long time, when markets have no expectations. Unanimously, it is expected to be a non-event but yes, everyone will watch out for the ‘tone’ of his speech. This is a new trait we all are learning from the Americans – to read into the “tone” and then draw inferences. One would want to see if the RBI gives us some roadmap about when it plans to ease these current tightening measures. Obviously, it depends on the rupee and that might not be possible for the Governor to predict. We might get a broad perspective and factors which will undo or influence tightening measures. A rollback of interest rates at this juncture is simply not even on the agenda – with rupee and retail inflation continuing to remain weak spots.

The market is likely to shrug off this policy in the wink of an eye and move on, setting eyes on the RBI Governor counterpart in America – Ben Bernanke. The Federal Open Market Committee (FOMC) meet is scheduled for 30-31 July and the Indian markets are more eager to know the “tone” of Bernanke, whether he would give any indication of the QE easing. Bloomberg had conducted a survey amongst economists and majority expect easing is expected to begin in September, reducing the bond buying from $85 billion per month to $65 billion. Many economists are of the view that markets have more or less accepted the QE easing and they have come to terms with it. Most surveyed felt that asset buying will be stopped in the second or third quarter of next year.

Bernanke’s tone will be extremely important for emerging markets – stock as well as forex markets. If easing is announced, the rupee v/s dollar dance could begin once again and one wonders what more measures RBI will come up with if rupee falls again. Yes, Subbarao also could be eagerly watching what Bernanke announces in the coming two days. His speech will have a direct bearing on what happens in the Indian markets. Maybe Subbarao will be forced to act once again, outside the policy?

RBI will be watching the rupee very closely and all action will be now directed towards reining in, if and when the fall comes. Yes, tightening to contain the rupee is imperative but this will come at the cost of growth. The tightrope walk will now be between rupee and growth. The selloff, if and when it comes due to QE easing, will be temporary but the rupee at time, will need to be contained. That, will be the priority or else as such, falling rupee could wipe off some growth.

Thus tomorrow is a non-event. The real even to look ahead is indeed the FOMC meet. And in that aspect, Wednesday could be a more important day, which will decide which side the chips will fall.