Thursday, March 26, 2015

Rising Dollar - Threat to Emerging Economies

Hat Tip: BIS

As Fed moves closer to raise interest rates, the dollar denominated debt is coming back to haunt emerging economies as both absolute levels of debt and interest rates on the debt will rise. 
 
 

Friday, November 7, 2014

We don't need no Intervention

One of the key roles of a central bank (or a monetary authority) is to manage inflation expectations. Inflation expectations are nothing but expected future trajectory of inflation. Central Banks try to set inflation expectations, to help businesses and citizens plan their future investments, lives accordingly.

RBI in India for instance, will regularly communicate its analysis of existing inflation trends and its expected future trajectory - food basket prices, liquidity situation, credit and deposit growth etc. with the market. This is done to reduce the gap between the view of RBI and what every individual and corporate’s calculation and expectation of inflation is.

Also, inflation expectations feed into future inflation. For example, if you as an employee know (from RBI releases) what inflation trend is going to be in a particular year, you would plan to negotiate a better than inflation salary hike (or work towards it) during your annual appraisal and your employer may try to protect his margins (profits) by getting more work out of you and/or raising the price of the product/service he's selling. This series of events will eventually increase the inflation.

On the other hand, if people expect future inflation to be low, they will postpone their consumption (or purchase) and hence affect demand which will lead to lower prices and lower inflation or deflation.

The other implicit role of RBI is to foster monetary and financial stability conducive to sustainable economic growth.

Now, in the battle between growth and inflation, RBI is at crossroads.

On one hand, pro-growth economists argue that inflation is now at a subdued level and ground is now set for reduction in prevailing interest rates to stimulate investments and growth in the economy.

On the other hand, critics of this camp argue that the fight against inflation is not yet over and the respite is a temporary one.

Whether to cut interest rates or not - remains a tough call to make.

Interest rates are function of demand and supply of money in the market. When the supply of money is higher than the demand, price of money i.e. interest rates fall and vice versa. So, a sure way to reduce interest rates is to increase the supply of money in the market and that is what we have seen happening in developed economies of US (Quantitative Easing, or QE), Europe (rate cuts by ECB) and Japan (Abenomics) recently.

These developed economies are trying to stimulate their economies by infusing liquidity into the system. All these stimulus programs normally run a four step course:

a. A central bank infuses liquidity, typically by lowering the money market interest rates. Or it buys treasury/corporate bonds, raising their prices and hence lowering the yields and cost of funds in the markets.

b. The easing leads to a steepening of the yield curve, benefiting bank margins and enhancing their willingness and capability to lend.

c. Businesses and consumers respond to the lower borrowing costs by raising capital to expand and increase their activities.

d. ..which ultimately leads to rebound in economic growth and other macro indicators.

Luckily, Indian central bank does not have to go through all this pain to stimulate the markets.

When RBI is grappling with dilemma of whether to cut or not, market has slowly and steadily done what it does best - reconciling reality to the expectations.

Increasing foreign fund flows in the Indian markets (equity and debt) have led to excessive liquidity in the system which has led to lowering of cost of borrowing for Indian corporates.


According to recent news reports, firms have been using more commercial paper than bank credit for their short term capital requirements. The reason is simple.

Money market rates have fallen sharply, and are trending below lending rates offered by banks. This effect can be seen from the following chart where 10 days moving call money average has fallen below repo rates and have stayed there for most of 2014.

Repo rate is what banks pay to central bank for the money they have borrowed in the event of any shortfall in funds.




Moreover, banks being flush with liquidity are facing a rare situation of bulk deposit rates falling below retail deposit rates. The minimum historical spread of 1% has now fallen to negative 25bps.

So, when banks can get cheaper funds from corporates, why to pay retail customer more. So, they have now started cutting their deposit rates which will eventually lead to fall in lending rates.

Not to mention, bond prices have already started reflecting a rate cut in Dec 2 RBI meeting as yields on benchmark 10-year bond has been continuously falling.

Lower-than-expected inflation data and tumbling global commodity prices have led to a belief in the bond markets that the Reserve Bank of India (RBI) will soften its stance on interest rates at the next policy review on Dec 2. This may be followed up by a rate cut at the start of the next fiscal year, according to several traders and bank treasurers.

All this is happening without RBI intervention.

So, the bottomline is rates are coming down, whether RBI decides to cut key lending rates or not. RBI's decision on rates on Dec 2 will however, tell us where are we in our battle against inflation.

Sunday, August 10, 2014

Weekly Market Commentary - Aug 4, 2014 - Aug 8, 2014

The week started off with good positive movement in anticipation of more relaxation in funds available to lenders from RBI. RBI didn’t disappoint on that one. While reducing the SLR and bond holdings percentage in HTM portfolio, governor made sure the funds availability for investment into productive assets increases considerably.

The governor did acknowledge that the fight with inflation is far from being over and there needs to be more cautiousness and patience on the street before he gets into the rate cutting mood.

The highlight of the week was Governor Raghuram Rajan warning that global markets are at the risk of a "crash". The culprit he identified was the loose monetary policy game developed economies are playing where they are trying to outdo each other in charging rock bottom interest rates.

Raghuram Rajan in an interview said, “unfortunately, a number of macro- economists have not fully learned the lessons of the great financial crisis. They still do not pay enough attention - en passant - to the financial sector. Financial sector crises are not as predictable. The risks build up until, wham, it hits you".

Sensex ended this week down by 0.6% while Nifty was down by 0.4% and Midcap down by 1.1%

Monday - Sensex up by 1.0%, Nifty up by 1.1%, Midcap up by 1.1%
Benchmark indices started the week with an upward move led by software services exporters such as Infosys which gained as rupee weakened ahead of RBI's policy review. Market is widely expecting RBI to keep interest rates on hold as inflation is still outside central bank’s comfort zone.

Tuesday - Sensex up by 0.7%, Nifty up by 0.8%, Midcap up by 0.7%

Both Sensex and Nifty inched higher as RBI loosen the grip on liquidity more while keeping the interest rates unchanged as expected. Central bank reduced the Statutory Liquidity Ratio by 50bps to 22% of deposits (SLR is the amount of liquid assets such as gold or govt. (approved) securities, that a bank must maintain as reserves other than the cash). This move will help banks to channel more funds into productive sectors of the economy.

Wednesday - Sensex down by 0.9%, Nifty down by 1.0%, Midcap down by 0.6%

Markets snapped as RBI policy review effects get absorbed in the market. Lenders such as SBI and ICICI fell on worries that RBI move of reducing SLR requirement and amount of bonds in held-to-maturity (HTM) portfolio will led to rise in yields and decline in value of their debt holdings. The existing benchmark 10-year bond yield surged 10bps to 8.83%, its biggest single-day rise in four months, on Tuesday and an additional 2bps on Wednesday.

Thursday - Sensex down by 0.3%, Nifty down by 0.3%, Midcap down by 0.5% 
Markets continued to trade weaker as both Sensex and Nifty declined by 0.3% on profit booking. Geo-political concerns also weighed on the investors’ mind.

Friday - Sensex down by 1.0%, Nifty down by 1.1%, Midcap down by 1.7%
Investors continued to stay cautious as US President Barack Obama authorized targeted air strikes in Iraq. There was a sell-off in global markets on rising worries of another drawn-out conflict in the region.

Saturday, February 22, 2014

Weekly Market Commentary - Feb 17, 2014 - Feb 21, 2014

Markets cheered the vote-on-account. Some investors appreciated the excise duty cuts meant to boost the auto, manufacturing and capital goods sectors, while others celebrated FM meeting his fiscal deficit target of 4.8%. In fact, he has done better and achieved fiscal deficit of 4.6%. Sensex ended the week 300 points up.

However, if we look closely to the vote-on-account statements, we will observe that a lot of accounting talent has been put to use to fudge the numbers to meet the above target. FM postponed the subsidies; recorded revenues in advance; coaxed public sector companies like Coal India and few PSU banks into paying special dividends - harming the interest of their minority shareholders; moved money from one public company to another as in the case of IOC, where ONGC and Oil India will buy stake from govt.

Govt accounting has made Enron look good. Incoming govt will have an uphill task in getting the fiscal house in order.

Sensex ended this week up 1.6%, Nifty was up by 1.8% while CNX Midcap was up by 2.1%.

Monday – Sensex up by 0.5%, Nifty up by 0.4%, Midcap up by 0.1%
Markets recovered their lost ground during the closing as some buying emerged as air around the interim budget cleared. Govt move to reduce excise duty from 12% to 8% for small cars, bikes; from 30% to 24% for SUVs and; from 24% to 20% for mid segment cars came as a huge relief to reeling auto sector. Govt also reduce the excise duty for capital goods and consumer durables by 200 bps to provide a fillip to ailing manufacturing sector. FM’s accounting jugglery to meet fiscal deficit target helped India to escape the danger of rating cut from premier rating agencies.

Tuesday - Sensex up by 0.8%, Nifty up by 0.9%, Midcap up by 0.9%
Markets went up as the optimism from govt move to avoid the populism and provide a boost to certain sectors in the form of excise duty cuts improved the investor confidence. Banking sector stocks led the rally as expectations of turnaround in economy led to rise in expectations of more lending.

Wednesday – Sensex up by 0.4%, Nifty up by 0.4%, Midcap up by 0.6%
Benchmark indices continued to be buoyed by positive sentiment generated by vote-on-account. The gains were mainly on the back of overnight gains in the US market and sustained capital inflows from foreign funds.

Thursday – Sensex down by 0.9%, Nifty down by 1.0%, Midcap down by 0.2%
Market had a pullback as China reported weak manufacturing data and US maintained its stand of tapering of quantitative easing.

Friday – Sensex up by 0.8%, Nifty up by 1.1%, Midcap up by 0.8%
Stocks went up as US factory activity accelerated at its fastest pace in four years in February leading to rise in firming up of all Asian markets.

Sunday, February 16, 2014

Weekly Market Commentary - Feb 10, 2014 - Feb 14, 2014

Highlights of this week will be the growing contrast between US economy, which has shown some strong signs of recovery in their economy, and Indian story, whose biggest facilitator public sector banks have started crumbling under the weight of increasing NPAs. The chance of some bank going under or requiring state assistance or bail-out have become very strong since United Bank of India story went out. State Bank of India’s weak results is indicator of how deep the mess is.

It is India’s worst kept secret that our public sector banks (and their investors) are suffering under crony capitalism –which reached its zenith under UPA regime. It is a high time now when our banking regulator – RBI may take a leaf out of its Governor Raghuram Rajan’s widely read book “Saving Capitalism from the Capitalist”- rolls up its sleeve and gets our banks out of clutches of this govt-crony nexus.

Sensex ended this week flat, Nifty was slightly down by 0.2% while CNX Midcap was down by 1.3%.

Monday – Sensex down by 0.2%, Nifty down by 0.2%, Midcap down by 0.3%
Markets continued their lackadaisical performance as earnings season continues without any major surprise. Investors continued to book profits on IT and banking sectors. Beginning of two-day nationwide strike by public sector bank staff also affected the trading on banking counters.

Tuesday - Sensex up by 0.1%, Nifty up by 0.2%, Midcap up by 0.1%
Indices rose slightly led by two Tata group companies. Tata motors rose the most in two months after its quarterly profit tripled. Tata Steel Ltd gained to its highest level in three weeks before its earnings report. The gains in Sensex were offset by fall in RIL shares after Delhi Chief Minister Arvind Kejriwal filed an FIR against Mukesh Ambani.

Wednesday – Sensex up by 0.4%, Nifty up by 0.4%, Midcap flat
Markets rallied after US Congress agreed to advance legislation extending US borrowing authority. Also, newly appointed Fed Chairman Janet Yellen held off from making any changes to tapering schedule set the Asian shares soaring.

Thursday – Sensex down by 1.2%, Nifty down by 1.4%, Midcap down by 1.3%
Earnings disappointment in Cipla and Coal India stocks dragged the benchmark indices down. Also, govt released data indicated that industrial output contracted by 0.6% in December meaning all is still not well with the economy although retail inflation did ease to its two year low of 8.79%.

Friday – Sensex up by 0.9%, Nifty up by 0.8%, Midcap up by 0.3%
Sensex rose on last day of the week as some traders rushed to cover their shorts ahead of presentation of interim union budget next week. Meanwhile, January WPI numbers came at 5.05% vs. 6.2% in December, lower than ET-Now poll estimate of 5.5%.

Sunday, February 9, 2014

Weekly Market Commentary - Feb 3, 2014 - Feb 7, 2014

Indian investors seem to have become defensive, as no new strong catalysts seem to emerge before elections in May. In fact, some of them are worried that current establishment may play a populist card to garner as much voting support as it can. The 70,000 crores farm loan waiver that UPA govt doled out is still bleeding the public sector banks’ balance sheets.

FIIs are already closing out positions in India and are avoiding fresh positions till elections. They have cut their positions worth $340mn since US Fed decided to cut its stimulus package further by $10bn on Jan 29.

Indian markets are expected to be “source of fund” for FIIs in coming months as they put their money in other markets where current environment is more congenial.

Sensex and Nifty ended this week with losses of 0.7% and 0.4% respectively while CNX Midcap fell 0.8%.

Monday – Sensex down by 1.5%, Nifty down by 1.4%, Midcap down by 1.1%
Markets continued their weak performance from previous week with Sensex falling more than 300 points as China manufacturing slowdown coupled with US Fed’s cut in stimulus spending sent caution among the foreign investors across the globe.

Tuesday - Sensex and Nifty flat, Midcap up by 0.4%
Indices recovered a little as investors cover their shorts and some value emerged during the end of the day. FIIs continued to stay net sellers and are expected to avoid any fresh buying before elections.

Wednesday – Sensex up by 0.2%, Nifty up by 0.4%, Midcap up by 0.6%
Markets stayed beaten down with no fresh buying seen across most of the counters. Short covering led to the up movement in some of the indices stocks.

Thursday – Sensex up by 0.2%, Nifty up by 0.2%, Midcap up by 0.3%
Market inched towards its week high as FIIs turned net buyers. Bargain hunting is leading to small gains in the indices as Indian markets continues to practice caution like other emerging markets ahead of US non-farm payroll data.

Friday – Sensex up by 0.3%, Nifty up by 0.4%, Midcap up by 0.7%
Markets ended the day at its week high as all emerging markets took cue from small US rally previous day. US stocks rallied ahead of non-farm payrolls data as unemployment benefit applications declined which is as indications of improving labour market and US recovery.

Sunday, December 29, 2013

Weekly Market Commentary - Dec 23 - Dec 27, 2013

2013 is coming to close. Markets registered a gain on last week of this year as it did in the first week of this year. Highlights of this year were all the noise around QE tapering from US Fed that led to a roller coaster ride for our currency and stock markets. Although, it all turned out to be a whimper but it did give a wakeup call to Indian govt. to get its act together. Add to all this mayhem the cancellation of POSCO and ArcellorMittal plans to setup plants in India, scams, inflation, gang rapes, policy paralysis, rating downgrade warnings and uncertainty around elections. So, there was the ground, seven layers of shit and then us.

Nonetheless, our markets recovered their old glory as Sensex made new highs. Market rejoiced as veterans returned to take care of their broken legacies; stalwarts were appointed to guide our way through fiscal mess, save rupee and general public from scourges of inflation; and anti-corruption wave made way for more business friendly governments and ushered into a new era as a one year old party made people realize that their voices are not unheard.

As many of the above problems have remained unsolved, hope has emerged as country prepares to elect its new leadership in 2014. Let us hope for an even better and interesting 2014.

I wish a very happy and prosperous new year to my readers.

Sensex gained 0.5%; Nifty gained 0.6% while CNX Midcap was up by 2.5% this week.

Monday – Sensex up by 0.1%, Nifty up by 0.2%, Midcap up by 1.1%
Upward movement during the first half of the trading day was capped by late selling seen in Infosys, which saw exit of another key management personnel, HDFC, which saw some profit booking after RBI said inflation fighting is still their topmost priority. Market momentum stayed bullish as global indices firmed up though some volatility generally increases near F&O expiry date.

Tuesday - Sensex down by 0.3%, Nifty down by 0.3%, Midcap up by 0.5%
Markets remained choppy as investors stayed cautious ahead of F&O expiry on Dec 26. Global markets also remained range-bound due to light trading activity ahead of holiday season.

Wednesday – Markets closed on occasion of Christmas

Thursday – Sensex up by 0.2%, Nifty up by 0.2%, Midcap up by 0.2%
Trading activity was mute on the F&O expiry day. Axis Bank rallied surged after the Cabinet Committee on Economic Affairs (CCEA) approved proposal to increase foreign investment in the bank from 49% to 62%.

Friday – Sensex up by 0.6%, Nifty up by 0.6%, Midcap up by 0.7%
Market closed the week higher led by gains in export-oriented sectors such as IT and Pharma as US data showed improved recovery in employment situation. Banks and FMCG also gained as street expects inflation data to be lower in January and RBI to maintain status quo on rates.

Sunday, December 22, 2013

Weekly Market Commentary - Dec 16 - Dec 20, 2013

Quite a week for Indian markets. With Fed’s tapering decision out of the way and uncertainty related to Indian govt’s stand on KG D6 gas price revision cleared, investors and business got another major sentiment boost from RBI governor who decided not to raise rates even in the midst of rising inflation. Therefore, what resulted is Sensex regaining 21,000 level while focus now shifted to food inflation data, which, if strengthened, may warrant a rate hike from RBI.

Sensex gained 1.8%; Nifty gained 1.7% while CNX Midcap was up by 3.1% this week.

Monday – Sensex down by 0.3%, Nifty down by 0.2%, Midcap up by 0.4%
Sensex failed to gain ground as impending rate hike concerns, post high inflation numbers, have kept the street nervous. Street is widely expecting a repo rate hike of 25bps to 8.00% in Dec 18 policy review. Recent govt data shows that costly vegetables, particularly potato and onion has pushed the November WPI to 7.52% from 7% previous month while CPI has jumped to 11.24% warranting inflation controlling measures from central bank.

Tuesday - Sensex down by 0.2%, Nifty down by 0.3%, Midcap down by 0.1%
Markets traded in the narrow range as investors stayed cautious ahead of RBI policy review meet on Wednesday.

Wednesday – Sensex up by 1.2%, Nifty up by 1.3%, Midcap up by 1.5%
RBI sprung a surprise as it decided to maintain the status quo and left the rates unchanged. Investors’ sentiments turned bullish as RBI governor Raghuram Rajan indicated lowering of inflation in near term due to falling vegetable prices but promised to act if inflation did not subside as expected.

Thursday – Sensex down by 0.7%, Nifty down by 0.8%, Midcap down by 0.4%
There was some selloff as Fed announced $10bn of tapering every month. Neither the selloff nor the tapering decision came as a surprise. Federal Open Market Committee (FOMC) expects that with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline.

Friday – Sensex up by 1.8%, Nifty up by 1.7%, Midcap up by 1.7%
Markets went up as Fed’s QE tapering decision is finally out of its way and as expected did not have major impact on either stocks or currency. Sensex got a major boost as govt. finally cleared Reliance Industries’ demand of higher gas prices while asking them to deposit a guarantee equivalent to any incremental revenue. With this decision, govt has cleared lot of uncertainties in the oil and gas industry and made easier for foreign companies to invest in India.

Friday, December 20, 2013

Summary of RBI-Analyst Conference Call - Dec 18, 2013

Dr. Raghuram Rajan (RRR): Recent readings suggest that headline inflation, both retail and wholesale, have increased mainly, but not exclusively on account of food prices. There is, however, reason to wait before determining the course of monetary policy. There are indications that vegetable prices may be turning down sharply. RBI has decided to maintain the status quo.

Reserve Bank will be vigilant and will act if expected softening of food inflation does not materialize and it does not translate into a significant reduction in headline inflation in the next round of data releases, or if inflation excluding food and fuel does not fall.

Gautam Rajesh Kumar, Trust Financial Consultancy: Given the fact that stability in Forex market has returned, CAD has come down, liquidity in the banking system is relatively comfortable, what is the comfort level of inflation for RBI to act on policy rate?

RRR: At this point trying to specify a final target is probably premature, but we do want to see both headline and core inflation come down. So we are also interested in seeing headline inflation which includes the food and fuel component also stabilise and fall.

Srinivasa Varadarajan, Mount Nathan Capital Management: In 1QCY14, it is estimated that about $15 billion of the oil swap will mature and will increase the rupee liquidity in the system. Will the period be used to actually push through the government debt swap at that point in time.

RRR: Actually the net amount is less than $7 billion right now. So that is approximately what will have to be repaid overtime. As and when the time comes, we will take a view as to how that repayment happens and it could be settled through an exchange of rupee funds based on the settlement amount. It could also be, the swaps could be rolled over if necessary and of course if market conditions permit, it can also be repaid. 

Namrata Narkar, IDBI Bank: WPI inflation forecast is being placed largely between 6% and 7% for March 2014. How much of deviation from this forecast is tolerable and if the deviation is above the tolerable level, would the composition of such a deviation then hold significant?

RRR: It depends on not just the WPI, but a whole set of other measures. On the WPI we have been very clear on bringing headline below 5 and core below 3. 

Prasanna, ICICI Securities: You have mentioned the negative output gap as a key factor in helping to contain inflation. Does that mean you do not expect the output gap to narrow in coming quarters and therefore you expect FY15 growth to remain around levels observed in H1FY14?

RRR: My personal sense is that with growth at let us say around 5%, we have somewhere between 1.5%-2% output gap at this point. So with that kind of situation, I think it will take a year or two to get back to potential and therefore we have some room or some time in which the output gap will continue to be negative and exert downward pressure on inflation.

Badri Niwas, Citi Bank: Given you have the experience of July, would you give some guidance to the market on whether the RBI will again use monetary policy tools as a defence for the currency in event of disruption risk that you mentioned manifesting?

RRR: There are some people who argue the disruption this time will be more limited, partly because people have already reacted somewhat over the last 3-4 months. And from India’s perspective, we are in a better position because a) our CAD is much more contained, b) our reserves have grown and we have shown an ability to raise funding if necessary and c) We have lost a fair amount in short maturity bond funds which have the ability to leave more quickly and what remains are the longer term funds. 

Anjali Verma, PhillipCapital: RBI is in favour of removing gold import restrictions. Is it the right time to the remove restrictions and what adverse impact it can have on CAD.

RRR: Gold restrictions are distortion and they are a necessary distortion at this point to restore balance to the CAD. But going forward we would not like this distortion to persist and we would like to remove it.

Ashish Kela, Birla Sun Life Asset Management: Dr. Rajan had highlighted the need to provide real returns to savers. What is the plan on this front? Will this play a role in the monetary policy?

RRR: The question of providing real returns to savers is very much on our minds. We do want to restore savings growth and move towards financial savings by households and I think we have to bring inflation down to make sure that these returns are positive. In the meantime there are stop gap arrangements that are part of a longer term strategy. One example of that is inflation indexed bonds in which real returns are fixed at1.5%.

Rajeev Malik, CLSA: Given widespread macro level demand supply imbalances, what is the efficacy of a blunt instrument such as interest rate in loading CPI core inflation in the supply constrained economy?

RRR: Some of the areas where we had high inflation- pulses and milk- some of that inflation has come down considerably which means there is a supply response that is kicking in and higher prices are a way to activate that supply response. More generally, even in a situation where there are supply constraints of one kind or the other, to the extent that demand exceeds supply, it creates inflationary pressures, some of it is a necessary price adjustment or relative price adjustment, but some of it feeds into more widespread wage inflation. 

Aastha Gudwani, Birla Sun Life: Are we done with the rollback of exceptional measures taken in July, is the cap on LAF here to stay? If yes, then how do you intend to reinstate repo as the permanent operative rate?

RRR: We have ample liquidity and we are largely, with a little bit of volatility, near about the repo rate as being the operational rate. So in that sense I think we have gone back to normal monetary policy at this point.

Sunday, December 8, 2013

Weekly Market Commentary - Dec 2 - Dec 6, 2013

Indian investors are a happy lot this week. Though tapering sword is still hanging over bullish investor sentiments, it seems investors have lot to rejoice over the coming days. Not just exit polls have sounded a victory for their favorite PM candidate, but it has also forced the govt. to increase the pace of their reforms as a last ditch effort to thwart the current anti-incumbency wave in the country. Govt. is back to its disinvestment ways to fill the deficit gap and is likely to make some reform announcements benefitting power and sugar industries.

Sensex gained 1.0%; Nifty gained 1.4% while CNX Midcap was up by 1.1% this week.

Monday – Sensex up by 0.5%, Nifty up by 0.7%, Midcap up by 0.7%
Markets cheered the 2QFY14 GDP growth of 4.8% vs. 4.4% in previous quarter, according to data released by govt. The growth numbers were in-line with street estimates. Also, HSBC PMI index recorded improvement in manufacturing activity for the first time since July. The Index for the manufacturing industry climbed to 51.3 in November from 49.6 in previous month.

Tuesday - Sensex down by 0.2%, Nifty down by 0.3%, Midcap flat
Markets ended up lower as investors resorted to profit booking and cautiousness ahead of Fed’s job report expected at the end of the week. Any improvement in the job recovery may lead to decision in favour of tapering of QE by Federal Reserve. Investors also stayed cautious as India’s capital, New Delhi prepares for polls next day. Even a good announcement from RBI was unable to lift the mood of the market. RBI announced that India’s current account deficit (CAD) narrowed sharply to $5.2bn or 1.2% of GDP in 2Q, from $21bn or 5% last year.

Wednesday – Sensex down by 0.7%, Nifty down by 0.7%, Midcap down by 1.0%
Market sentiments were weak as rise in crude prices added to inflationary concerns. Investors raised concerns that this may lead RBI to raise rates again raising the cost of doing business in the country.

Thursday – Sensex up by 1.2%, Nifty up by 1.3%, Midcap up by 0.8%
Markets went up and regained 21,000 levels as exit polls showed BJP coming to power in at least 4 out of 5 states that had elections recently. BJP is widely viewed as business friendly party among the host of other parties contesting the elections. Any success in state elections will be a testimony of BJP Prime Ministerial candidate Narendra Modi’s popularity and acceptance.

Friday – Sensex up by 0.2%, Nifty up by 0.3%, Midcap up by 0.5%
Exit polls results kept markets up and gave boost to the idea that congress might try to get more reform measures passed in the run up to the main elections in May 2014.

Sunday, November 24, 2013

Weekly Market Commentary - Nov 18 - Nov 22, 2013

Fed’s tapering stayed the talk of the town as markets look exhausted due to lack of any domestic or global cues. The question of will they cut or will not and when continues to linger over the market’s direction.

Sensex lost 0.9%, Nifty lost 1.0% and CNX Midcap was down by 0.9% this week.

Monday – Sensex up by 2.2%, Nifty up by 2.2%, Midcap up by 1.3%
Market continued to rally after Janet Yellen new chair of Fed Reserve allayed fears over QE tapering. Also, RBI governor Rajan’s statement to have an accommodative liquidity stand strengthened the rupee and boosted the investor sentiment.

Tuesday - Sensex up by 0.2%, Nifty up by 0.2%, Midcap flat
Lack of catalysts in the domestic markets makes sure that any rally or euphoria is short lived. Markets were flat as investors stayed cautious and booked profits.

Wednesday – Sensex down by 1.2%, Nifty down by 1.3%, Midcap down by 0.6%
Sensex floundered due to lack of any domestic or global cues. Investors booked profits in banking, IT and capital goods as market sees no new investment and project been announced till the elections are concluded in May.

Thursday – Sensex down by 2.0%, Nifty down by 2.0%, Midcap down by 1.7%
Release of minutes of Federal Open Market Committee (FOMC) meet spooked the investors globally as it indicated tapering might began in next few months, if economy improves. Fed’s doublespeak is confusing the markets as previous week they indicated any tapering is still far away.

Friday – Sensex down by 0.1%, Nifty down by 0.1%, Midcap up by 0.1%
Markets continued to stay cautious as Fed’s comments on tapering confused the investors.

Sunday, November 17, 2013

Weekly Market Commentary - Nov 11 - Nov 15, 2013

Global markets continue to anchor on central governors’ announcements for directions. This anchoring is making many market participants nervous. As results season nears its end in India, market is struggling to find any catalyst to move up. And as we know, when indices are not moving up, they are moving down. Can’t stay confused/range bound/flat or in inaction for long.

Sensex lost 1.3%, Nifty lost 1.4% and CNX Midcap was down by 1.1% this week.

Monday – Sensex down by 0.8%, Nifty down by 1.0%, Midcap down by 0.9%
Continuing weakness in rupee had its effect on investors. Investors continue to stay cautious as September IIP and October retail inflation numbers are due for release tomorrow.

Tuesday - Sensex down by 1.0%, Nifty down by 1.0%, Midcap down by 1.0%
Although market consensus indicates a recovery in IIP at 3.6% in September vs. 0.6% in August, it is the retail inflation, which is causing nervousness among the participants. Street expects CPI for October to be at 10% vs. 9.84% previous month. Also, car sales, considered by investors as a signal of consumer sentiment, provided little cheer with domestic sales declining 3.9% in October.

Wednesday – Sensex down by 0.4%, Nifty down by 0.5%, Midcap down by 0.7%
Street was little disappointed as IIP numbers came in lower at 2% for September vs 3.6% consensus while CPI was on higher side with rise of 10.09% in October. Investors have again started speculating a rate hike in coming December 18 meeting of the RBI.

Thursday – Sensex up by 1.0%, Nifty up by 1.1%, Midcap up by 1.5%
Markets cheered the Janet Yellen’s statement that US economy is still underperforming and Fed will continue its liquidity support for some more time. Janet Yellen is set to replace Ben Bernanke as Federal Reserve Governor soon.

On domestic front, Raghuram Rajan again sprung back to action and soothes the nerves of the investors with announcement of 8,000 crores of bond buying program to infuse liquidity in the system.

Friday – Markets closed on occasion of Muharram

Saturday, November 9, 2013

Weekly Market Commentary - Nov 4 - Nov 8, 2013

Markets struggled to find ground as Diwali euphoria dies out. In addition, returning of oil companies to source their dollar requirements from market got the rupee falling again, which worried the investors.

Global investors remained nervous over what continues to be their single most important concern: Will there be talks of Fed tapering or not in the next meeting.

Markets lost all the gains they made previous week. Sensex lost 2.5%, Nifty lost 2.6% and CNX Midcap was down by 0.3% this week.

Monday – Markets closed on occasion of Balipratipada

Tuesday - Sensex down by 1.2%, Nifty down by 1.0%, Midcap up by 0.6%
Markets closed down as India’s service sector activity, as measured by HSBC / Markit purchasing managers index, contracted for fourth successive month as economic uncertainty continues. The index improved to 47.1 in October from 44.6 in September but continued to stay below 50, which indicates contraction.

Wednesday – Sensex down by 0.4%, Nifty down by 0.6%, Midcap down by 0.1%
Investors are treading cautiously as S&P warned that it might downgrade India’s credit rating if next government fails to chart out a path to bring back the country to high growth. S&P currently has 'BBB-/A-3' sovereign credit rating on India with negative outlook. The rating major will conduct its next review after the general elections, which are due by May 2014; unless the country's fiscal or external standing deteriorates.

Thursday – Sensex down by 0.3%, Nifty down by 0.4%, Midcap down by 1.4%
Markets continued to stay range bound as oil companies return to market for their dollar requirements, which had got investors worried over depreciation in rupee. Any further depreciation in rupee may affect FIIs inflow in the domestic markets.

Friday – Sensex down by 0.8%, Nifty down by 0.8%, Midcap down by 0.1%
Markets continued to stay under pressure, as recent depreciation in rupee value brings back the inflation worries. Rise in inflation or inflation expectations may prompt RBI governor to hike rates again raising the cost of doing business in already reeling economy.

Investors were also cautious ahead of Fed meeting as improving US economic conditions fuelled the talks of tapering by US Federal Reserve.

Sunday, November 3, 2013

Weekly Market Commentary - Oct 28 - Nov 1, 2013

Growing inflation, rising NPAs, deteriorating governance and still here we are at record high Sensex. As we all know, this rally is liquidity driven and this liquidity will not stop flowing until March next year. At least that is what street was expecting. I feel unless the rally spreads to midcaps and small caps (as the chart below suggests it hasn’t) it can’t be relied upon and can fizzle out anytime in next two quarters. It is advisable that investors book profits in the names, which have rallied beyond what their fundamentals would suggest.
Sensex gained 2.5%, Nifty gained 2.6% and CNX Midcap was up by 3.5% this week.

Monday – Sensex down by 0.5%, Nifty down by 0.7%, Midcap down by 0.8%
Markets were little jittery ahead of RBI monetary policy review meeting on Tuesday. A 25 bps repo rate hike is widely expected on the street. Fed is also scheduled to meet on Tuesday to discuss their tapering plans.

Tuesday - Sensex up by 1.7%, Nifty up by 2.0%, Midcap up by 1.5%
Markets went up as RBI actions were in line with what street was expecting. RBI raised the repo rate by 25 bps while cutting down the MSF rate by the same amount, thereby bringing the difference between them back to normal 100 bps. Mood was also bullish due to Fed’s decision of keeping their liquidity taps open and short coverings ahead of derivative expiry on Thursday.

Wednesday – Sensex up by 0.5%, Nifty up by 0.5%, Midcap up by 0.1%
Markets continued their momentum from previous day but were largely volatile ahead of F&O expiry next day.

Thursday – Sensex up by 0.6%, Nifty up by 0.8%, Midcap up by 1.5%
Sensex rose to its all time high amidst the sustained buying from institutional investors who ignored the latest Fed pronouncement of stopping the QE sooner than expected. As of now, market is factoring tapering to begin in March next year.

Friday – Sensex up by 0.2%, Nifty up by 0.1%, Midcap up by 1.2%
Strong support from FIIs and Fed’s decision to continue its QE program for now continued to take Sensex to a new high.

Sunday, October 27, 2013

Weekly Market Commentary - Oct 21 - Oct 25, 2013

What might appear to be a dull week was actually quite interesting. Sensex tried to regain its old glory by rising within a handshake distance of all time high. In early 2008, when Sensex was at its peak, everybody (almost) believed India could do no wrong. Today investors are more cautious than ever.

Some bulls reason that current rally is sustainable due to good corporate results. This is not true. Markets are rallying as US Fed decided to defer its QE tapering decision and India benefits as it gets its share of global portfolio allocation.

Better than expectations result (was expectations low or results were actually better) helped the bulls find a fundamental story in the yarn they were already weaving.

Anyways, not all sectors have posted good results. Most of the cement stocks, the sector that should be the early riser in case of recovery, posted 50-80% decline in their quarterly profits.

We believe we want to believe.

Sensex lost 1.0%, Nifty lost 0.7% and CNX Midcap was up by 0.3% this week.

Monday – Sensex up by 0.1%, Nifty up by 0.3%, Midcap up by 1.0%
Markets are range bound, as investors get concerned about valuation levels. Easy liquidity flow continued to prop up the market levels.

Tuesday - Sensex down by 0.1%, Nifty flat, Midcap up by 0.4%
Investors continued to stay cautious as global markets wait for release of US jobs data later in the day. Jobs numbers are one of the critical figures, which US Fed looks out for to decide on its tapering plans.

Wednesday – Sensex down by 0.5%, Nifty down by 0.4%, Midcap down by 0.2%
Weak US jobs data firmly pushed expectations for the tapering of Federal Reserve stimulus into next year. Markets opened higher earlier in the day but lost all gains as interest rate sensitive stocks see selling pressure ahead of RBI meeting on Oct 29.

Thursday – Sensex down by 0.2%, Nifty down by 0.2%, Midcap flat
Sensex continues to see resistance as most of the stocks stayed in high valuation range while investor’s fear of another rate hike of 25 bps by RBI led to selling in rate sensitive stocks.

Friday – Sensex down by 0.2%, Nifty down by 0.3%, Midcap down by 1.0%
Sensex ended the day in negative after a brief rally during the day. India’s economic fundamentals do not support the current market levels. Investors continued to book profits in IT companies.

Sunday, September 22, 2013

Weekly Market Commentary - Sept 16 - Sept 20, 2013

India, since Fed announced its tapering plans, got its act together and has done quite well in pushing some key reforms in parliament. RBI on its part took some controversial, but crucial steps to stem the decline in rupee that followed the Fed announcement. Now, when Fed has put a halt on its tapering plans, we all can just keep our fingers crossed and hope that Indian govt. does not become complacent and let go off this lifeline. We hope that reform momentum continues and we get our house in order before the next shitstorm hit us.

Sensex gained 2.7%, Nifty gained 2.8% and CNX Midcap was up by 1.3% this week.

Monday – Sensex flat at 0.0%, Nifty down by 0.2%, Midcap down by 0.5%
Investors were disappointed on Monday as RBI released its WPI inflation figures. RBI while formulating its policies uses WPI data along with CPI as an anchor. According to data released on Friday, retail inflation dropped in August. However unlike retail inflation, WPI rose to six month high to 6.1% in August (July – 5.79%). Market is anticipating that upturn in WPI will make it difficult for newly appointed RBI governor to cut rates.

Tuesday - Sensex up by 0.3%, Nifty up by 0.2%, Midcap down by 0.3%
Investors remain cautious ahead of two key events this week. On Sept 18, Fed will take decision on whether to continue to taper and by how much. Street is expecting tapering of $5-$10 billion every month. Anything above or below that range can cause sharp movements in the indices. Raghuram Rajan has decided to unveil its maiden policy on Sept 20 after getting a handle on Fed announcements. These two events together may hold key to future movements of Indian indices.

Wednesday - Sensex up by 0.8%, Nifty up by 0.8%, Midcap up by 0.5%
Expectations from Fed meeting continue to weigh on the markets. Markets closed higher as FIIs continue to build positions in the Indian markets.

Thursday – Sensex up by 3.4%, Nifty up by 3.7%, Midcap up by 2.9%
Fed surprised the market with announcement of deferring its tapering plans and instead decided to continue with its stimulus amid weak economic growth in US. I already highlighted in June that how the timing of tapering is suspicious as US economy, and with it global economy, continues to struggle. Markets celebrated the decision as day of reckoning for many of emerging economies like India, has deferred to some unknown date in the future.

Friday – Sensex down by 1.9%, Nifty down by 1.7%, Midcap down by 1.3%
In his maiden policy, Raghuram Rajan stumped the investors with a repo rate hike. Repo rate is now 7.25%. Rajan made it clear that fighting the inflation and exchange rate management is his top priority, so there is a need of liquidity tightening. RBI, in a bid to lower the cost of capital of banks, reduced the MSF by 75 bps from 10.25% to 9.5% and slashed the minimum daily CRR requirement from 99% to 95%.


Friday, August 30, 2013

Weekly Market Commentary - Aug 23 - Aug 30, 2013

This week witnessed the most productive parliament in recent history (pardon the oxymoron) where Govt was able to pass two landmark bills viz. Food Security Bill and Land Acquisition Bill. While the jury is still out on whether these bills will be able to help the poor and farmers of the nation or are simple vote fetching attempts of ruling party and will forever drown our poor under behemoth of Indian bureaucracy and corruption, we can be sure of one thing: Rising cost of living.

Sensex gained a little 0.5%, Nifty was flat and Midcap lost 0.8% this week.

Monday - Sensex up by 0.2%, Nifty up by 0.1%, Midcap up by 0.7%
Markets went up as FM tried to convince investors to expect some good decisions in next one week to attract capital flows to finance our rising current account deficit. In addition, a slump in US home sales allayed the fears of tapering in Fed stimulus spending which boosted the investor sentiment.

Tuesday - Sensex down by 3.2%, Nifty down by 3.5%, Midcap down by 2.4%
Mayhem in the markets as Govt was successful in passing Food Security Bill in Lok Sabha (Lower House of the Parliament). Food subsidy is now expected to cost around 1% of GDP to the exchequer, according to Govt calculations but analysts estimates it to be 3% of the GDP. See my recent post on subsidy bill calculation here. Rupee made all-time low of 68.80 against the dollar as FIIs scrambled for exit.

Wednesday - Sensex up by 0.2%, Nifty flat, Midcap down by 1.1%
Markets recovered a bit from yesterday’s crash as investors hunt for bargains in IT, Capital Goods and Healthcare sector. India’s largest insurer Life Insurance Corporation of India did some buying and provided support to the falling indices. Stocks remained under pressure as sabre rattling in Syria sent the crude price higher and rise in credit risks across the emerging markets.

Thursday - Sensex up by 2.2%, Nifty up by 2.3%, Midcap up by 1.5%
Benchmark index rose dramatically as investors cover their shorts on the last Thursday of the month. Also, RBI’s move to start a forex swap facility to help PSU oil companies meet their daily dollar demand provided support to rupee which gained by 2.5% against the dollar.

Friday - Sensex up by 1.2%, Nifty up by 1.2%, Midcap up by 0.6%
Markets continued their previous day’s upside momentum as Prime Minister Manmohan Singh clearly stated in his speech in parliament that he will take all measures to fight country’s deficit without bringing in capital controls and reversal of reforms. He also made clear that his Govt is going ahead with reforms including subsidy reduction and implementation of GST.


Friday, August 23, 2013

Weekly Market Commentary - Aug 19 - Aug 23, 2013

To say that markets were volatile would be an understatement this week. Sensex lost around 700 points in first three days and gained 600 in last two. This week highlights were new lows made by rupee and RBI turning dovish (throwing in the towel?) and attempting easing liquidity in the market after a spell of tightening measures to fight the currency decline (which didn’t work of course, but RBI did claim victory!). Sensex and Nifty ended this week down 0.4% and 0.7% respectively, while CNX Midcap was down 1.6%.

Monday - Sensex down by 1.6%, Nifty down by 1.7%, Midcap down by 1.9%
Markets continue to plunge as investors voted with their feet as currency fell to its new all-time low of 62.81 vs. USD. Govt’s move of clearing few investment projects worth Rs.1,100bn was unable to provide any support to the market.

Tuesday - Sensex down by 0.3%, Nifty down by 0.2%, Midcap down by 0.6%
Investors’ worries seem not to be abating as any of the RBI measures have failed to stem rupee declines. So far, Indian IT and Pharma stocks have been able to save investors from full scale carnage in the markets.

Wednesday - Sensex down by 1.9%, Nifty down by 1.8%, Midcap down by 1.5%
A fresh low of 64.55 a dollar made by rupee prompted investors to even exit and book profits on their IT and Pharma stocks. RBI, in a bid to ease liquidity in the system and reduce long-term cost of borrowing announced purchase of Rs80bn worth of bonds in the market on Aug 23 and may buy more if required. This RBI action came as a breather to banks and banking stocks rallied amid the falling market.

Thursday - Sensex up by 2.3%, Nifty up by 2.0%, Midcap up by 1.1%
Tape turned green for the first time this week as RBI signaled change in its monetary stance. RBI also stated that its measures on short-term policy rates have stained their objectives, which send a positive signal to the market indicating no more tightening in short term. Bullish sentiment in the market overcame the Fed announcement on continuing tapering of its QE and new low made by rupee against the dollar.

Friday - Sensex up by 1.1%, Nifty up by 1.2%, Midcap up by 1.2%
Markets continued their previous day’s upside momentum as investors rushed to bargain hunting especially in capital goods sector, which has been facing lot of bearishness owing to delay in large scale projects in the country and abroad and increase in cost of borrowings.


Wednesday, July 17, 2013

RBI: Picking up fights it cannot win

In his famous book Thinking Fast and Slow, Daniel Kahnemann cites a study conducted on football goalkeepers. That study deduced that a goalkeeper would be able to save more goals, if he chose to stay standing at one place. However, a goalkeeper, like most of us, will rather risk a goal than to face embarrassment (however imaginary) of audience seeing him not doing anything. Our RBI governor Subbarao seems to be in that position.

Subbarao, in his fresh bid to boost rupee has indirectly led to hike in interest rates. Apparently, every other central banker in emerging market is busy raising the interest rates to stem the fall of their currencies. RBI has also announced that it is soon going to sell bonds to suck out the excessive liquidity from the markets, which it believes to be responsible for volatile rupee.

Indian businesses and citizens are facing less than comfortable investment climate, delays in policy implementations, which has led to higher unemployment or stagnant wages, and not to mention RBI’s key enemy, the one on which it was focused on till now, high inflation. Then, Fed Chairman Ben Bernanke issued a statement talking about tapering of bond purchases i.e. reducing stimulus spending which led to FIIs started exiting emerging markets in droves, taking the rupee down with them. Apparently, the yield gap between US debt and Indian debt has been reducing, making the Indian debt less attractive.

Now, if you are RBI governor, would you rather focus on spending your reserves on fighting off fall in your currency, which is not just India-specific phenomena or you rather try to polish bright the India investment story (by way of easing off liquidity). It is a classic buyback stocks vs. invest in your own plant situation. I will choose the latter. What inflows you lose from debt markets, you can counter them from inflows in stocks or FDIs if you start rebuilding your fundamental story. And that will in turn will help the rupee, by way of improved sovereign ratings, investment climate etc. etc. But, that is just me.

No doubt, that RBI’s current actions have impeded the case for rate cut announcement on coming July 30 meeting, but my guess is that RBI is going to announce some compensatory measure in the form of small rate cut or cut in mandatory CRR, now the inflation data is largely range-bound and within RBI’s comfort zone of sub 5%.