Two key events will determine the Indian investors' sentiment this week -- the Reserve Bank of India (RBI) monetary policy and the U.K. election.
Local action first. The RBI policy may turn out to be a non-event, and while there may be a softer tone, that is probably the extent of dovishness that we may witness. Couple of factors that may lead to no cuts this time:
1) RBI had changed its stance from 'Accommodative' to 'Neutral' in its February policy, signalling that rate cuts in the near future are unlikely.
2) The minutes of the last monetary policy in April had in fact hinted at a rate hike as it sees an upside risk to inflation in the current financial year.
It seems unlikely, in light of the recent stance taken, that the central bank will take a U-turn on its stance just yet. RBI would probably wait for the next policy in August, see the impact of monsoon and commentary from the U.S. Federal Reserve (which is likely to raise rates, but maintain a cautious stance), and then take a call to cut rates, if at all.
The U.K. election is a different ball game altogether. Theresa May's party is expected to win, but the margin of victory has narrowed in recent polls. Should there be a result which thwarts this assumption, one could expect short-term reactions.
The equity markets are expected to gyrate to any U.K. result led move, in an otherwise strong market, with no major trigger for sharp swings this week.
Yes, one may argue on stretched valuations, but that has been there for a while now. The immediate trigger may not be that, but it may eventually be blamed for the "correction", if any. Wait and watch, seems to be the mantra for now. Watch closely though, in case the moves are swift.
Niraj Shah is Markets Editor at BloombergQuint.