Now is the time to buy equities, bonds, currency

Investors should look ahead into the first quarter of fiscal 2012-13 for better things to come and buy equities, bonds and the currency now.
It is a good time to put away the negative sentiment prevailing over equities, bonds and currency and look at the positive side of things. The Sensex, the Nifty and the rupee are down over 10% this year to date while the 10-year benchmark bond yields are up over 90 basis points (bps).
Inflation, rate hikes and global economic turmoil have affected investor sentiment. Inflation and rate hikes are peaking out while an agreement among European Union members on resolving the sovereign debt crisis in the euro zone can alleviate fears on global economic turmoil.
According to the Reserve Bank of India (RBI), inflation is still a threat that is not going away soon. The RBI has put up strong fences against inflation through a series of policy rate hikes, including the latest one of 25 bps that has taken the benchmark repo rate from 4.75% to 8.5% in over 18 months. The RBI has signaled that it's done with its defences against inflation but a constant vigil has to be maintained. Inflation is expected to stay over 9% till end December 2011 before trending down to 7% levels by end March 2012. Until the threat of inflation passes, monetary policy will be tight though there will not be any more repo rate hikes.
Investors will have to be patient till the threat of inflation passes. Going by RBI's forecast, inflation is likely to stay at a lower trajectory in the first half of fiscal 2012-13. Inflation staying at lower levels will give the central bank the necessary ammunition to drop its vigil and look at confidence boosting measure such as increasing system liquidity and reducing policy rates.
Markets are forward looking. RBI's comment on the last of the rate hikes coupled with a reformist savings rate deregulation measure has enthused a strong rally in equity markets, with the Sensex and the Nifty rallying over 2% each.
Bond yields too fell by around 6 bps post policy announcement while the rupee gained over half a percent against the dollar. The market's enthusiasm may not last too long, given the headwinds of global economic issues, poor government finances and higher interest rates, but there is definitely a sense of relief that rate hikes are over or is on its last legs.
The savings bank rate deregulation is reformist. The RBI has allowed banks to determine their own rates on savings bank accounts, which until October 25 was fixed by the central bank. Banks can nowcompete with each other for deposits and this will benefit the customer on the deposit side and the borrowing side as banking efficiencies will improve. Equity markets have initially started to single out banks with high savings bank accounts to sell (HDFC Bank, SBI, PNB all fell over 2.5% over the day) but, in the long run, efficiency will gain over short-term sentiments.