Market movements this week were dominated by currency related headlines. Rupee has slumped lower versus dollar and has raised the fears of inflation making a comeback via expensive imports. The selling, which was till recently going on in large cap stocks has spread to midcap stocks as well. Sensex ended this week with a loss of 1.3%, while Nifty and CNX Midcap lost 1.2% and 4.0% respectively.
Monday - Sensex up by 0.1%, Nifty down by 0.1%, Midcap down by 1.3%
Market traded under the pressure of depreciating currency. Rupee touched a low of 58 versus dollar and stoked inflation fears among the investors. IT stocks went higher will most of the midcap stocks slumped as currency traded lower.
Tuesday - Sensex down by 1.5%, Nifty down by 1.5%, Midcap down by 1.9%
Markets sentiments continued to be weighed down by currency depreciation. Recent good news from RBI related to decline in inflation as shown by downward movement in WPI and CPI have been totally offset by fears of inflation strengthening again as rupee continues to slide against the dollar. FIIs continued to sell Indian bonds as yield difference with US bonds lessen.
Wednesday - Sensex down by 0.5%, Nifty down by 0.5%, Midcap down by 0.4%
Markets were volatile as the rupee found support in the Economic Affairs Ministry's comments that the fall is a temporary phase and news that RBI has intervened by selling dollars. There were also reports that govt may raise FDI limits to finance CAD.
India also released its IIP and CPI numbers. While IIP growth came lower at 2% in April vs 3.4% in March, May CPI came in at 9.31% vs 9.39% in April. Decline in IIP growth has raised concerns whether RBI will cut rates in an attempt to stimulate growth although RBI's hands will be tied as rupee continues its slump.
Thursday - Sensex down by 1.1%, Nifty down by 1.1%, Midcap down by 1.9%
Market traded lower as selling continued among no rate cut hopes, rising CAD and higher inflationary expectations.
Friday - Sensex up by 1.9%, Nifty up by 1.9%, Midcap up by 1.4%
Markets took a reprieve from continuous selling it was witnessing from past few sessions as investors hinged their hopes on rate cut from RBI next week after May WPI came lower at 4.7%.
Friday, June 14, 2013
Wednesday, June 5, 2013
Inflation Indexed Bonds - Real risk of good intentions turning into bad economics?
Indian FM, in its current pursuit to contain fiscal deficits, have taken certain strong measures. One of the important steps taken is introduction of inflation linked bonds. FM is desperately trying to wean off Indian investors from their insatiable demand for gold which is widely considered a hedge against inflation and one of the main culprits behind rising deficits.
Govt earlier tried to discourage the gold demand by raising the import duty from 2% to 6% in beginning of this year but met with little success. Gold recently sent a shocker down the Govt spine when Apr statistics indicated a 138% jump in gold imports to $7.5 billion, taking the current account deficit to $17.8 billion from $10.3 billion in March.
Govt now is re-attempting to provide an alternative investment route in the form of inflation linked bonds to protect the investors against rising prices. In its earlier attempt in 1997, Govt offered protection to only principal payment. But this time, it went one step ahead and offered interest income to be also indexed to protect against inflation.
RBI's bond sale on Tuesday was a success as the corporates lapped up the product. Issue will open for retail investors in October this year.The main selling point is an offer of 1.44% real yield over the final WPI, with almost four months lag period, which means current offer is linked to January 2013 WPI rate.
There are two major issues with the current bond sale. First, the debt is indexed to WPI, which we know calculates the price changes in the trades among the corporates NOT consumers or retail investors. This essentially means, bond does not provides consumers protection against the rising prices, what best it does is provide partial protection. There is almost 4.5% difference between current WPI and CPI numbers. Though, it is too early to speculate on its impact on gold demand, I am not sure replacing WPI with CPI as the inflation benchmark in the offer would have served the purpose of streamlining the Govt finances.
Second major issue is, which is really a downside, what happens if, we faltered on our path to regain the lost growth, FII flows dries up due to some reason and we are left with falling currency, which fires up the inflation and inflationary expectations in domestic economy and Govt is left with huge bonds liability in a slow growth environment which will raise Govt borrowing costs and inturn stoke further inflation. Nobody on the street is seem to be discussing this.
What all I know is, global economy is not out of mess, markets are been artificially inflated with central bankers printing huge quantity of money, commodity prices are down - not because of increasing competition or supply but decline in demand across the developed countries and every important economy is struggling to get growth back on its feet.
Govt earlier tried to discourage the gold demand by raising the import duty from 2% to 6% in beginning of this year but met with little success. Gold recently sent a shocker down the Govt spine when Apr statistics indicated a 138% jump in gold imports to $7.5 billion, taking the current account deficit to $17.8 billion from $10.3 billion in March.
Govt now is re-attempting to provide an alternative investment route in the form of inflation linked bonds to protect the investors against rising prices. In its earlier attempt in 1997, Govt offered protection to only principal payment. But this time, it went one step ahead and offered interest income to be also indexed to protect against inflation.
RBI's bond sale on Tuesday was a success as the corporates lapped up the product. Issue will open for retail investors in October this year.The main selling point is an offer of 1.44% real yield over the final WPI, with almost four months lag period, which means current offer is linked to January 2013 WPI rate.
There are two major issues with the current bond sale. First, the debt is indexed to WPI, which we know calculates the price changes in the trades among the corporates NOT consumers or retail investors. This essentially means, bond does not provides consumers protection against the rising prices, what best it does is provide partial protection. There is almost 4.5% difference between current WPI and CPI numbers. Though, it is too early to speculate on its impact on gold demand, I am not sure replacing WPI with CPI as the inflation benchmark in the offer would have served the purpose of streamlining the Govt finances.
Second major issue is, which is really a downside, what happens if, we faltered on our path to regain the lost growth, FII flows dries up due to some reason and we are left with falling currency, which fires up the inflation and inflationary expectations in domestic economy and Govt is left with huge bonds liability in a slow growth environment which will raise Govt borrowing costs and inturn stoke further inflation. Nobody on the street is seem to be discussing this.
What all I know is, global economy is not out of mess, markets are been artificially inflated with central bankers printing huge quantity of money, commodity prices are down - not because of increasing competition or supply but decline in demand across the developed countries and every important economy is struggling to get growth back on its feet.
Friday, May 31, 2013
Weekly Market Commentary - May 27 - May 31, 2013
We started the week with big bang news of another potentially huge discovery in KG-D6 by RIL and ended the week with weak, but expected sub 5% 4Q GDP numbers.
In the context of current Indian market performance, you can safely say that current volatility is the by-product of easy liquidity and uncertain economic environment. Every new economic data brings with it the question everyone is asking, whether this is the last of the bad news we are receiving. With every data release, we hear experts talking about Indian market bottoming out. But have we?
Current GDP figures are at decade low, consumption is showing decline, rupee is falling, RBI is dithering on rate cuts and Indian investor is choosing to stay away from stocks making our markets even more vulnerable to sudden FII outflow which could prove disastrous to the economy. This week sensex made a small gain of 0.3% while Nifty and CNX Midcap ended flat.
Monday - Sensex up by 1.7%, Nifty up by 1.7%, Midcap up by 1.2%
Sensex zoomed past 20K mark, gaining more than 350 points in the process. Main catalyst was Reliance Industries late Friday announcement of big gas discovery in KG D6 basin. Company is planning to start appraisal drilling soon to ascertain the amount of gas discovered. It remains to be seen how much of this gas, Reliance, can actually drill out commercially. Discovery also gives Reliance an additional weapon to strongly pursue market pricing of gas with govt. RIL, along with its partner BP are currently negotiating for higher price for their KG-D6 gas which is strongly contested by Petroleum Ministry and Fertilizer Ministry. There was also some short covering seen in the market, as current F&O contract expires this week.
Tuesday - Sensex up by 0.6%, Nifty up by 0.5%, Midcap up by 0.6%
Markets remained cautious ahead of GDP data announcement on Friday. Coal India, country's largest coal supplier, which reported earnings post market hours previous day, reported a jump of 35%, beating the consensus estimates, on the back of higher supplies and lower employee expenses. Company also announced its decision to hike prices by 10%.
Wednesday - Sensex down by 0.1%, Nifty down by 0.1%, Midcap down by 0.6%
No major movements in Sensex, as markets focus on Friday GDP data announcement and F&O expiry. Sun Pharma, country's top drugmaker by market value, reported 23% rise in 4Q profits and announced a bonus share issue.
Thursday - Sensex up by 0.3%, Nifty up by 0.3%, Midcap down by 0.1%
Sensex made small gain as investors cover up their position on the day of F&O expiry. Tata Motors and Mahindra & Mahindra beat the consensus estimates while ONGC reported a decline in 4Q profit on the back of lower sales and higher payment on statutory levies.
Friday - Sensex down by 2.3%, Nifty down by 2.3%, Midcap down by 1.0%
Markets went downhill as GDP grew at mere 4.8% in 4Q and 5% for full fiscal year 2013. Though, the street was expecting sub 5% GDP figure for 4Q, it was the comments from RBI which set the bearish tone pushing the investors towards the exit. RBI governor maintained it cautious stance suggesting that inflation data still has upward risk while current account position stays out of comfortable range. These comments deprived the market of any rate cut hopes in June meeting and led to selling across the board. Rupee also took the hit and is trading now at close proximity of 57 to a dollar.
In the context of current Indian market performance, you can safely say that current volatility is the by-product of easy liquidity and uncertain economic environment. Every new economic data brings with it the question everyone is asking, whether this is the last of the bad news we are receiving. With every data release, we hear experts talking about Indian market bottoming out. But have we?
Current GDP figures are at decade low, consumption is showing decline, rupee is falling, RBI is dithering on rate cuts and Indian investor is choosing to stay away from stocks making our markets even more vulnerable to sudden FII outflow which could prove disastrous to the economy. This week sensex made a small gain of 0.3% while Nifty and CNX Midcap ended flat.
Monday - Sensex up by 1.7%, Nifty up by 1.7%, Midcap up by 1.2%
Sensex zoomed past 20K mark, gaining more than 350 points in the process. Main catalyst was Reliance Industries late Friday announcement of big gas discovery in KG D6 basin. Company is planning to start appraisal drilling soon to ascertain the amount of gas discovered. It remains to be seen how much of this gas, Reliance, can actually drill out commercially. Discovery also gives Reliance an additional weapon to strongly pursue market pricing of gas with govt. RIL, along with its partner BP are currently negotiating for higher price for their KG-D6 gas which is strongly contested by Petroleum Ministry and Fertilizer Ministry. There was also some short covering seen in the market, as current F&O contract expires this week.
Tuesday - Sensex up by 0.6%, Nifty up by 0.5%, Midcap up by 0.6%
Markets remained cautious ahead of GDP data announcement on Friday. Coal India, country's largest coal supplier, which reported earnings post market hours previous day, reported a jump of 35%, beating the consensus estimates, on the back of higher supplies and lower employee expenses. Company also announced its decision to hike prices by 10%.
Wednesday - Sensex down by 0.1%, Nifty down by 0.1%, Midcap down by 0.6%
No major movements in Sensex, as markets focus on Friday GDP data announcement and F&O expiry. Sun Pharma, country's top drugmaker by market value, reported 23% rise in 4Q profits and announced a bonus share issue.
Thursday - Sensex up by 0.3%, Nifty up by 0.3%, Midcap down by 0.1%
Sensex made small gain as investors cover up their position on the day of F&O expiry. Tata Motors and Mahindra & Mahindra beat the consensus estimates while ONGC reported a decline in 4Q profit on the back of lower sales and higher payment on statutory levies.
Friday - Sensex down by 2.3%, Nifty down by 2.3%, Midcap down by 1.0%
Markets went downhill as GDP grew at mere 4.8% in 4Q and 5% for full fiscal year 2013. Though, the street was expecting sub 5% GDP figure for 4Q, it was the comments from RBI which set the bearish tone pushing the investors towards the exit. RBI governor maintained it cautious stance suggesting that inflation data still has upward risk while current account position stays out of comfortable range. These comments deprived the market of any rate cut hopes in June meeting and led to selling across the board. Rupee also took the hit and is trading now at close proximity of 57 to a dollar.
Sunday, November 9, 2008
Inflation conundrum
Okay, let’s start from basic definition of inflation which is increase in the prices of goods due to reasons such as high demand (which is demand-pull inflation), due to some supply constraints or increase in the resource cost (cost-push inflation) and inflation caused by some past events whose effects are still felt (hangover inflation). Inflation is also defined as too much money chasing too few goods. What it certainly means and what many people fail to see is that inflation is a monetary phenomenon.
Yes, I say it again; inflation is a monetary phenomenon which can entirely be controlled by manipulating the money supply in the market, as most central bankers in the world are busy doing these days. One of my friend argued that, if it is that simple then how would you explain that flood in Indonesian mines leads to increase in coal prices or something like even during the period when the money supply is constant, prices of goods continues going up? Well this post will try to answer just these questions.
Let’s take a simple example of a country with only three residents Amar, Akbar and Anthony. Every month Amar purchases some amount of coal from Akbar and rice from Anthony. He pays Rs.50 each for one kg of both items. One particular month, there’s not been much rain, so rice crop was not that great. So Anthony has to put some extra efforts to grow one kg of rice to sell to Amar. When Amar came to purchase rice from Anthony, he saw a sign board with a sign of "Rice – Rs.100/kg" at his shop. He was little disappointed as he had only Rs.100 in the pocket and he was also suppose to purchase one kg of coal from Akbar. So what should this poor guy do?
There are two ways this guy can go; either he purchase ½ kg of rice and 1 kg of coal or he may buy some more rice and cut a slack on amount of coal.
Now imagine that there is a banker, who is ready to provide Amar extra money, let’s say Rs.50 to purchase rice, what will happen then? Well, Amar is going to use that money in addition to the money he has, to buy one kg of rice at Rs.100 and coal at Rs.50 from Akbar and Anthony respectively. Now if you compare Amar’s commodity price basket, you may well comment that total expenditure for same quantity of goods has increased from Rs.100 to 150, an increase of Rs. 50 from previous month i.e. 50% inflation rate!
This inflation would not have been there, if there was no other source of liquidity available to this country. This change in price level has got nothing to do with the supply and demand of rice and coal but with the supply and demand of money. How much money is flowing in the market is actually the one and only determiner of inflation rate experienced by everyone. There might be few supply and demand shocks that may change the prices to drastic levels but that will be for short term as consumers will adjusts their portfolios to accommodate these changes. In the long run, it is the supply and demand of money which decided the inflation rate. As the central banker keeps on printing money, there will be more money available in the market which will lead to decline in the value of money which further will lead to every other good look expensive relative to the money.
This inflation would not have been there, if there was no other source of liquidity available to this country. This change in price level has got nothing to do with the supply and demand of rice and coal but with the supply and demand of money. How much money is flowing in the market is actually the one and only determiner of inflation rate experienced by everyone. There might be few supply and demand shocks that may change the prices to drastic levels but that will be for short term as consumers will adjusts their portfolios to accommodate these changes. In the long run, it is the supply and demand of money which decided the inflation rate. As the central banker keeps on printing money, there will be more money available in the market which will lead to decline in the value of money which further will lead to every other good look expensive relative to the money.
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