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 30, 2013
Tuesday, August 27, 2013
Have We Bitten More Than We Can Chew...
Reminder to our readers how much impact (read damage) newly proposed Food Security Bill can cause country’s balance sheet.
Hat tip to Surjit Bhalla for brilliant analysis in which he clearly shows Food Security Bill to be costing as much as 3% of India’s GDP, almost equal to total education spending. Read the article here.
Hat tip to Surjit Bhalla for brilliant analysis in which he clearly shows Food Security Bill to be costing as much as 3% of India’s GDP, almost equal to total education spending. Read the article here.
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.
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.
Sunday, August 18, 2013
Weekly Market Commentary - Aug 12 - Aug 16, 2013
This independence day, RBI took away some of the freedom from its citizens and corporate as it introduced measures to cap dollar movement outside the country. While RBI and govt did their best to allay the fears of capital control, it is everybody’s guess what other bad policy decision lies ahead for the market and for how long this drama will continue. Sensex and Nifty went down by 1% each, while CNX Midcap gained 0.4% this week.
Monday - Sensex up by 0.8%, Nifty up by 0.8%, Midcap up by 1.6%
Markets went up as investors bought stocks amid govt and RBI interventions to prop up rupee. Although the measure adopted by RBI has failed to curb any decline in the rupee value, trade date brought good news as exports grew by ~12% to $26bn in July. SBI’s latest quarterly release indicating worsening asset quality, which is putting a dent on its profitability, capped the investor confidence.
Tuesday - Sensex up by 1.5%, Nifty up by 1.5%, Midcap up by 1.5%
Markets rallied as investors rushed to cover their shorts after recent sharp corrections ignoring the poor IIP data. The index of industrial production (IIP) declined by 2.2% in June while industrial output was 1.1% lower y-o-y. Govt move to hike import duty on gold and silver to curb CAD also cheered the bulls.
Wednesday - Sensex up by 0.7%, Nifty up by 0.8%, Midcap up by 0.4%
Tata group companies saved the day as markets ignored the impact of rise in WPI to 5.79% in July from 4.86% in June. Tata Motors surged around 10% after its unit Jaguar Land Rover reported 21% higher sales in July globally. Tata Steel also beat the street expectations with consolidating net profit surging by 90%.
Thursday – Independence Day Holiday
Friday – Sensex down by 4.0%, Nifty down by 4.1%, Midcap down by 3.1%
RBI spooked the investors as they bring back capital controls and restricted the movement of USD outside the country. RBI on late Wednesday brought back controls on fund flows limiting the investment citizens and domestic companies can do abroad. It also banned the import of gold coins and medallions while introducing fresh measures to attract NRI money. Recent positive developments in US and other developed markets also instilled fresh fears of stimulus tapering from Fed, which added to the bearish sentiment.
Monday - Sensex up by 0.8%, Nifty up by 0.8%, Midcap up by 1.6%
Markets went up as investors bought stocks amid govt and RBI interventions to prop up rupee. Although the measure adopted by RBI has failed to curb any decline in the rupee value, trade date brought good news as exports grew by ~12% to $26bn in July. SBI’s latest quarterly release indicating worsening asset quality, which is putting a dent on its profitability, capped the investor confidence.
Tuesday - Sensex up by 1.5%, Nifty up by 1.5%, Midcap up by 1.5%
Markets rallied as investors rushed to cover their shorts after recent sharp corrections ignoring the poor IIP data. The index of industrial production (IIP) declined by 2.2% in June while industrial output was 1.1% lower y-o-y. Govt move to hike import duty on gold and silver to curb CAD also cheered the bulls.
Wednesday - Sensex up by 0.7%, Nifty up by 0.8%, Midcap up by 0.4%
Tata group companies saved the day as markets ignored the impact of rise in WPI to 5.79% in July from 4.86% in June. Tata Motors surged around 10% after its unit Jaguar Land Rover reported 21% higher sales in July globally. Tata Steel also beat the street expectations with consolidating net profit surging by 90%.
Thursday – Independence Day Holiday
Friday – Sensex down by 4.0%, Nifty down by 4.1%, Midcap down by 3.1%
RBI spooked the investors as they bring back capital controls and restricted the movement of USD outside the country. RBI on late Wednesday brought back controls on fund flows limiting the investment citizens and domestic companies can do abroad. It also banned the import of gold coins and medallions while introducing fresh measures to attract NRI money. Recent positive developments in US and other developed markets also instilled fresh fears of stimulus tapering from Fed, which added to the bearish sentiment.
Thursday, August 15, 2013
Once Upon a time in India Dobaara
Bollywood released its much awaited sequel of Ajay Devgan – Emraan Hashmi starrer “Once Upon a Time in Mumbaai” this Thursday. The jury is still out on whether the sequel, “Once Upon a Time in Mumbaai Dobaara” has lived up to the magic of first one (first one has some good lines delivered by Ajay and good acting skills of Emraan). In the meantime, there is another sequel being served to the country, which will definitely have wider ramifications than the movie.
This sequel could aptly be called “Once Upon a Time in India Dobaara” as India in an effort to curb currency decline, brings back capital controls, 90s style. RBI has announced slew of measures like reducing the Overseas Direct Investment (ODI) by Indian companies from 400% of net worth earlier to 100% now. Local residents also now have to go through RBI if they are sending more than $75,000 abroad for investments or otherwise. This limit was earlier set at $200,000.
RBI exempted banks from including fresh deposits from NRIs into reserve requirements, raised the ceiling on FCNR deposits to LIBOR + 400bps (300bps earlier) for 3-5 years deposits and banned the import of gold coins and medallions.
No points for guessing who’ll get hurt the most by these measures: the corporate as their plans to invest abroad due to weakening local investment climate are put on halt and; Local residents who bought residential property abroad (as some did in Southeast Asia at favorable terms during slowdown) and are making regular payments towards it.
Reader will vividly remember those 90’s movies where Amrish Puri and Ranjeet were widely feared bad guys, used to spend their nighttime near Bombay beaches with a torch in their hands, for their “consignment” which was most of the time, you guessed it right, used to be gold biscuits. Latest import curbs and rising duties on gold have already started turning local Indians into smugglers (See here and here) as already one high profile case of a member of big industrial house caught smuggling on Mumbai airport has been highlighted by local media.
I have long argued (see here and here) that problems with our currency are largely fundamental ones and these govt policies are at best, can only be termed shortsighted. Investors are going to sell off your currency if they don’t find any value in it, if not today, tomorrow. But this is one definite, which is going to happen. Therefore, instead of using weak currency to make your economy export competitive and make some efforts towards solving your structural problems, you stop your citizens from importing anything from abroad.
Some people might argue that focusing on structural problems may not yield any short-term result and nobody in the current establishment has time and patience to wait. But isn’t that the same attitude which has landed us in current mess.
You ask anyone in establishment about their purpose behind these measures, you get a terse two word reply: Rupee stabilization. What they don’t tell you is when they think rupee has stabilized. Given our country’s problem, it doesn’t look like it is going to happen anytime soon and there is a strong chance that current measures and controls are not as temporary as they are sounded out to be.
This sequel could aptly be called “Once Upon a Time in India Dobaara” as India in an effort to curb currency decline, brings back capital controls, 90s style. RBI has announced slew of measures like reducing the Overseas Direct Investment (ODI) by Indian companies from 400% of net worth earlier to 100% now. Local residents also now have to go through RBI if they are sending more than $75,000 abroad for investments or otherwise. This limit was earlier set at $200,000.
RBI exempted banks from including fresh deposits from NRIs into reserve requirements, raised the ceiling on FCNR deposits to LIBOR + 400bps (300bps earlier) for 3-5 years deposits and banned the import of gold coins and medallions.
No points for guessing who’ll get hurt the most by these measures: the corporate as their plans to invest abroad due to weakening local investment climate are put on halt and; Local residents who bought residential property abroad (as some did in Southeast Asia at favorable terms during slowdown) and are making regular payments towards it.
Reader will vividly remember those 90’s movies where Amrish Puri and Ranjeet were widely feared bad guys, used to spend their nighttime near Bombay beaches with a torch in their hands, for their “consignment” which was most of the time, you guessed it right, used to be gold biscuits. Latest import curbs and rising duties on gold have already started turning local Indians into smugglers (See here and here) as already one high profile case of a member of big industrial house caught smuggling on Mumbai airport has been highlighted by local media.
I have long argued (see here and here) that problems with our currency are largely fundamental ones and these govt policies are at best, can only be termed shortsighted. Investors are going to sell off your currency if they don’t find any value in it, if not today, tomorrow. But this is one definite, which is going to happen. Therefore, instead of using weak currency to make your economy export competitive and make some efforts towards solving your structural problems, you stop your citizens from importing anything from abroad.
Some people might argue that focusing on structural problems may not yield any short-term result and nobody in the current establishment has time and patience to wait. But isn’t that the same attitude which has landed us in current mess.
You ask anyone in establishment about their purpose behind these measures, you get a terse two word reply: Rupee stabilization. What they don’t tell you is when they think rupee has stabilized. Given our country’s problem, it doesn’t look like it is going to happen anytime soon and there is a strong chance that current measures and controls are not as temporary as they are sounded out to be.
Friday, August 9, 2013
Weekly Market Commentary - Aug 5 - Aug 8, 2013
Rupee decline remain the focus of the week and its continuing slide has caused jitters in the market. Investors are also keeping a close eye on unfolding drama in National Stock Exchange Ltd (NSEL), promoted by Financial Technologies (FTIL), which also owns 26% in MCX, nation’s leading commodity exchange. Sensex and Nifty went down by 2% each, while CNX Midcap gained 0.3% this week.
Monday - Sensex up by 0.1%, Nifty up by 0.1%, Midcap up by 0.3%
Markets pared the early gains made during the day as HSBC survey indicated that private manufacturing activity in the country has contracted for the first time in four years. The HSBC India composite index covers both services and manufacturing activities, declined to 48.4 in July from 50.9 in June. The tough investment climate in the country is taking its toll on business activity as investors are losing confidence in India story.
Tuesday - Sensex down by 2.3%, Nifty down by 2.5%, Midcap down by 2.5%
Sensex went down by 450 points as rupee hit a fresh low of 61.80 against the US dollar. RBI’s rescue plans are looking more like prayers than plan (stole a line from Andy Mukherjee).
Wednesday - Sensex down by 0.4%, Nifty down by 0.4%, Midcap up by 1.3%
Markets continued to weigh down by ongoing slide in rupee value against the dollar. Investors are worried that rupee might hit 64 in the near term and will cause more pain to already weak Indian economy.
Thursday - Sensex up by 0.7%, Nifty up by 0.8%, Midcap up by 1.2%
Indian markets bounced back after recent sell-offs owing to declining rupee value against the dollar. Ranbaxy Laboratories jumped 28% after good showing in US business sales. Maruti jumped 4% after there were news that Indian govt may cut excise duties on vehicles to revive falling demand.
Friday – Eid Holiday
Monday - Sensex up by 0.1%, Nifty up by 0.1%, Midcap up by 0.3%
Markets pared the early gains made during the day as HSBC survey indicated that private manufacturing activity in the country has contracted for the first time in four years. The HSBC India composite index covers both services and manufacturing activities, declined to 48.4 in July from 50.9 in June. The tough investment climate in the country is taking its toll on business activity as investors are losing confidence in India story.
Tuesday - Sensex down by 2.3%, Nifty down by 2.5%, Midcap down by 2.5%
Sensex went down by 450 points as rupee hit a fresh low of 61.80 against the US dollar. RBI’s rescue plans are looking more like prayers than plan (stole a line from Andy Mukherjee).
Wednesday - Sensex down by 0.4%, Nifty down by 0.4%, Midcap up by 1.3%
Markets continued to weigh down by ongoing slide in rupee value against the dollar. Investors are worried that rupee might hit 64 in the near term and will cause more pain to already weak Indian economy.
Thursday - Sensex up by 0.7%, Nifty up by 0.8%, Midcap up by 1.2%
Indian markets bounced back after recent sell-offs owing to declining rupee value against the dollar. Ranbaxy Laboratories jumped 28% after good showing in US business sales. Maruti jumped 4% after there were news that Indian govt may cut excise duties on vehicles to revive falling demand.
Friday – Eid Holiday
Sunday, August 4, 2013
RBI Analyst Conference Call Summary
Headline
RBI kept all the policy rates unchanged; the repo rate, the reverse repo rate and the CRR. The MSF rate too stayed at 10.25% with a mark-up of 300 basis points above the repo rate.
Two key things on RBI's mind while drafting this policy: external sector concerns, especially those stemming from global financial markets over the last 10 weeks (read Fed stimulus tapering plans); the second was the standard concern of any central bank of maintaining growth and inflation balance.
On Growth
On the domestic front, the silver lining is that the monsoon so far has been above long term average. However, industrial production is lower than what RBI thought it was and services sector activity is subdued in part because of because of tepid global demand.
Keeping all this mind, RBI revised its FY14 GDP growth projections downwards from 5.7% to 5.5%.
On Inflation
The biggest risk to inflation is from the depreciation of the rupee and the any pass-through from there. RBI’s recent study shows that the coefficient of pass-through has increased and now every 10% depreciation results in a 1.2% increase in inflation vs. 1.1% earlier.
Vulnerabilities
RBI discussed four risk factors in which biggest is vulnerability in the external sector, in particular sudden stop and reversal of capital flows seen over the last 10 weeks.
The second risk factor is the large CAD, which has stayed above the sustainable level for 3 years in a row and has affected external payment situation. Most external vulnerability indicators have deteriorated indicating that the economy’s resilience to external shocks is eroded.
The third risk factor is the continuing weak investment environment which remains weak because of a number of factors such as cost and time overruns, high leverage, deteriorating cash flows, erosion of asset quality and muted credit confidence.
The final risk factor is something that has sort of stuck, which is the supply constraints in the economy. There are a number of supply constraints especially in the food and infrastructure sectors which affect growth and inflation.
Guidance
RBI is caught in a classic ‘impossible trinity’ trilemma (more about it here). It has to forfeit economy’s growth inflation dynamic, informed monetary policy stance, in order to take care of external concerns.
RBI will roll back liquidity-tightening measures in a calibrated manner as forex markets stabilizes.
Q&A
Kaushik Das (DB): Hi, my question is regarding India’s reserve adequacy. As per the latest data, reserves can still cover about 6-7-months of imports but particularly worrying is the sharp increase in the short-term external debt on a residual maturity basis, which has touched $172 billion odd. So how concerned is RBI about this reserve adequacy position of India, especially when reserves are down further due to FX intervention?
The second question is regarding the potential growth rate of economy. Last year the expectation was that the potential growth rate has come down to about 6.5 to 7%. Does RBI think that the potential growth rate has fallen further in the wake of the developments of the last few months?
Dr. Urjit Patel (Dy. Guv): We actually feel that our reserves are adequate; 6.5 to 7-month of import cover is good, our short-term debt has increased but the short-term debt has been comfortably rolled over and refinanced over the last 3 years despite the high CAD. Even IMF, by the criteria they use, feels that our reserve position is adequate and comfortable.
On the potential growth, the RBI’s calculations and models suggest that it is about 7% now.
Sonal Varma (Nomura): I wanted to ask what is the risk that these tightening measures can precipitate into a bigger problem for the banking system, because of asset quality stress. What is the RBI’s view on that?
Dr. K. C. Chakrabarty: Anyhow, RBI will not be able to protect banks’ asset quality. Suppose, if you allow the exchange rate to depreciate, then the corporates, who have gone for ECB borrowings will default and banks asset quality will deteriorate. And if the rate has gone up then definitely because of the portfolio depreciation, they will be affected. We feel that HTM is more manageable because banks must understand the risk and we allow lot of amount to be put in the HTM category so this is a better option, which is our assessment.
Simon Flint (Dymon Asia Capital): Governor, you suggested that because of the large current account deficit, the rupee depreciation in some senses would be warranted. On the other hand, you do have some economists, I think including some in the Ministry of Finance who have argued that if you compare the present value of the rupee to the real effective exchange rate (REER), let us say which prevailed over 2004-2005, then the rupee is actually overshooting and is now undervalued. So I guess can you give us a sense of where you see rupee today relative to its fair value.
Dr. D. Subbarao: My answer to your very well argued question is quite short, that the RBI does not take a position on the level of the exchange rate. The depreciation of the currency has costs for the economy, but that is a different matter. We do not take a position on the exchange rate; there are various ways of calculating it including the way that you have indicated from the Ministry of Finance. All we said yesterday was that because of the current account deficit, the rupee would have depreciated and that has not happened because we have been able to finance it, and now that there is capital flow issues, those strains are coming into play, and the rupee is depreciating.
Rajeev Malik (CLSA): RBI has consistently maintained that it does not target any particular level and it is really only concerned with the volatility. The government on the other hand, every time the rupee slips, begins to get palpitations partly although not entirely, because of the impact on the fiscal front. How do you marry the two? At the end of the day a lot of that worsening because of rupee depreciation also has a feedback loop into how monetary policy is being conducted.
Dr. D. Subbarao: Both the government and the RBI are really on the same page as far as larger objective is concerned which is to control volatility. Neither the government nor the Reserve Bank is targeting any particular rate. And that is the message I think everybody listening in must take away.
RBI kept all the policy rates unchanged; the repo rate, the reverse repo rate and the CRR. The MSF rate too stayed at 10.25% with a mark-up of 300 basis points above the repo rate.
Two key things on RBI's mind while drafting this policy: external sector concerns, especially those stemming from global financial markets over the last 10 weeks (read Fed stimulus tapering plans); the second was the standard concern of any central bank of maintaining growth and inflation balance.
On Growth
On the domestic front, the silver lining is that the monsoon so far has been above long term average. However, industrial production is lower than what RBI thought it was and services sector activity is subdued in part because of because of tepid global demand.
Keeping all this mind, RBI revised its FY14 GDP growth projections downwards from 5.7% to 5.5%.
On Inflation
The biggest risk to inflation is from the depreciation of the rupee and the any pass-through from there. RBI’s recent study shows that the coefficient of pass-through has increased and now every 10% depreciation results in a 1.2% increase in inflation vs. 1.1% earlier.
Vulnerabilities
RBI discussed four risk factors in which biggest is vulnerability in the external sector, in particular sudden stop and reversal of capital flows seen over the last 10 weeks.
The second risk factor is the large CAD, which has stayed above the sustainable level for 3 years in a row and has affected external payment situation. Most external vulnerability indicators have deteriorated indicating that the economy’s resilience to external shocks is eroded.
The third risk factor is the continuing weak investment environment which remains weak because of a number of factors such as cost and time overruns, high leverage, deteriorating cash flows, erosion of asset quality and muted credit confidence.
The final risk factor is something that has sort of stuck, which is the supply constraints in the economy. There are a number of supply constraints especially in the food and infrastructure sectors which affect growth and inflation.
Guidance
RBI is caught in a classic ‘impossible trinity’ trilemma (more about it here). It has to forfeit economy’s growth inflation dynamic, informed monetary policy stance, in order to take care of external concerns.
RBI will roll back liquidity-tightening measures in a calibrated manner as forex markets stabilizes.
Q&A
Kaushik Das (DB): Hi, my question is regarding India’s reserve adequacy. As per the latest data, reserves can still cover about 6-7-months of imports but particularly worrying is the sharp increase in the short-term external debt on a residual maturity basis, which has touched $172 billion odd. So how concerned is RBI about this reserve adequacy position of India, especially when reserves are down further due to FX intervention?
The second question is regarding the potential growth rate of economy. Last year the expectation was that the potential growth rate has come down to about 6.5 to 7%. Does RBI think that the potential growth rate has fallen further in the wake of the developments of the last few months?
Dr. Urjit Patel (Dy. Guv): We actually feel that our reserves are adequate; 6.5 to 7-month of import cover is good, our short-term debt has increased but the short-term debt has been comfortably rolled over and refinanced over the last 3 years despite the high CAD. Even IMF, by the criteria they use, feels that our reserve position is adequate and comfortable.
On the potential growth, the RBI’s calculations and models suggest that it is about 7% now.
Sonal Varma (Nomura): I wanted to ask what is the risk that these tightening measures can precipitate into a bigger problem for the banking system, because of asset quality stress. What is the RBI’s view on that?
Dr. K. C. Chakrabarty: Anyhow, RBI will not be able to protect banks’ asset quality. Suppose, if you allow the exchange rate to depreciate, then the corporates, who have gone for ECB borrowings will default and banks asset quality will deteriorate. And if the rate has gone up then definitely because of the portfolio depreciation, they will be affected. We feel that HTM is more manageable because banks must understand the risk and we allow lot of amount to be put in the HTM category so this is a better option, which is our assessment.
Simon Flint (Dymon Asia Capital): Governor, you suggested that because of the large current account deficit, the rupee depreciation in some senses would be warranted. On the other hand, you do have some economists, I think including some in the Ministry of Finance who have argued that if you compare the present value of the rupee to the real effective exchange rate (REER), let us say which prevailed over 2004-2005, then the rupee is actually overshooting and is now undervalued. So I guess can you give us a sense of where you see rupee today relative to its fair value.
Dr. D. Subbarao: My answer to your very well argued question is quite short, that the RBI does not take a position on the level of the exchange rate. The depreciation of the currency has costs for the economy, but that is a different matter. We do not take a position on the exchange rate; there are various ways of calculating it including the way that you have indicated from the Ministry of Finance. All we said yesterday was that because of the current account deficit, the rupee would have depreciated and that has not happened because we have been able to finance it, and now that there is capital flow issues, those strains are coming into play, and the rupee is depreciating.
Rajeev Malik (CLSA): RBI has consistently maintained that it does not target any particular level and it is really only concerned with the volatility. The government on the other hand, every time the rupee slips, begins to get palpitations partly although not entirely, because of the impact on the fiscal front. How do you marry the two? At the end of the day a lot of that worsening because of rupee depreciation also has a feedback loop into how monetary policy is being conducted.
Dr. D. Subbarao: Both the government and the RBI are really on the same page as far as larger objective is concerned which is to control volatility. Neither the government nor the Reserve Bank is targeting any particular rate. And that is the message I think everybody listening in must take away.
Saturday, August 3, 2013
Weekly Market Commentary - Jul 29 - Aug 2, 2013
Markets continued to weigh down by RBI policy actions, which have raised the cost of doing business on the country. Banks, realty, metals, all rates sensitive stocks, were badly hit this week. RBI’s battle against the falling rupee has been futile as currency is back at 61 against the dollar. Sensex was down 3%, Nifty was down 3.5% and CNX Midcap 5.9% this week.
Monday - Sensex down by 0.8%, Nifty down by 0.9%, Midcap down by 1.3%
Markets continued their downward trend with investors acing cautious ahead of RBI meeting on Tuesday. RBI has tightened liquidity environment in a bid to save rupee from falling further. Many investors are nervous wondering whether RBI will continue its stance and increase the rates to make rupee investment attractive for FIIs, as SBI chairman suggested. Investors are also anticipating announcement related to sovereign debt offering country might plan to plug the deficit gap.
Tuesday - Sensex down by 1.3%, Nifty down by 1.3%, Midcap down by 2.4%
In its policy announcement, RBI kept all key rates unchanged (repo rate at 7.25%, CRR at 4%), but revised the country’s GDP growth projection for FY14 downwards from 5.5% to 5.7%. RBI also indicated its reservation about issuing of sovereign debt, calling the timing now not right. Markets plunged after the policy announcement and rupee tumbled down to 61 mark.
Wednesday - Sensex down by 0.0%, Nifty down by 0.2%, Midcap up by 0.2%
Sensex ended up flat after falling almost 220 points in its initial sessions. FM who indicated more liberalization policies are under consideration and encouraged PSUs to borrow from abroad saved the markets. Govt is also considering raising import duty on non-essential luxury items to contain CAD.
Bharti Airtel was among the top gainer, with the company showing growth signs in its ARPUs, which increased, to INR200 for 1Q14, +16 y-o-y, EBITDA margin increased to 32.3% from 29.6% a year back.
Thursday - Sensex down by 0.1%, Nifty down by 0.2%, Midcap down by 1.4%
Indian markets rallied during their early sessions with their Asian peers as China reported better than expected PMI data while US GDP growth also beating street estimates. However, later in the day, weaker manufacturing data put the brakes on the rally and drag down the markets back in the red zone.
Financial Technologies, promoter of MCX, leading commodity exchange of the country, tanked by 65% today as govt asked its National Spot Exchange to not to launch new products, following with firm (NSEL) decided to suspend trading and postponed settlement of all 1 day forward contracts.
Friday - Sensex down by 0.8%, Nifty down by 0.9%, Midcap down by 1.1%
Markets saw heavy selling across metals, power, realty and PSUs as concerns over rise in cost of operations in tight monetary environment has made investors bearish over these counters.
Financial Technologies fell another 23% as crisis over National Spot Exchange has dealt to commodity investors sentiments. Power Grid Corp fell 11% after firm announced plans to dilute equity to fund its investment plans.
Monday - Sensex down by 0.8%, Nifty down by 0.9%, Midcap down by 1.3%
Markets continued their downward trend with investors acing cautious ahead of RBI meeting on Tuesday. RBI has tightened liquidity environment in a bid to save rupee from falling further. Many investors are nervous wondering whether RBI will continue its stance and increase the rates to make rupee investment attractive for FIIs, as SBI chairman suggested. Investors are also anticipating announcement related to sovereign debt offering country might plan to plug the deficit gap.
Tuesday - Sensex down by 1.3%, Nifty down by 1.3%, Midcap down by 2.4%
In its policy announcement, RBI kept all key rates unchanged (repo rate at 7.25%, CRR at 4%), but revised the country’s GDP growth projection for FY14 downwards from 5.5% to 5.7%. RBI also indicated its reservation about issuing of sovereign debt, calling the timing now not right. Markets plunged after the policy announcement and rupee tumbled down to 61 mark.
Wednesday - Sensex down by 0.0%, Nifty down by 0.2%, Midcap up by 0.2%
Sensex ended up flat after falling almost 220 points in its initial sessions. FM who indicated more liberalization policies are under consideration and encouraged PSUs to borrow from abroad saved the markets. Govt is also considering raising import duty on non-essential luxury items to contain CAD.
Bharti Airtel was among the top gainer, with the company showing growth signs in its ARPUs, which increased, to INR200 for 1Q14, +16 y-o-y, EBITDA margin increased to 32.3% from 29.6% a year back.
Thursday - Sensex down by 0.1%, Nifty down by 0.2%, Midcap down by 1.4%
Indian markets rallied during their early sessions with their Asian peers as China reported better than expected PMI data while US GDP growth also beating street estimates. However, later in the day, weaker manufacturing data put the brakes on the rally and drag down the markets back in the red zone.
Financial Technologies, promoter of MCX, leading commodity exchange of the country, tanked by 65% today as govt asked its National Spot Exchange to not to launch new products, following with firm (NSEL) decided to suspend trading and postponed settlement of all 1 day forward contracts.
Friday - Sensex down by 0.8%, Nifty down by 0.9%, Midcap down by 1.1%
Markets saw heavy selling across metals, power, realty and PSUs as concerns over rise in cost of operations in tight monetary environment has made investors bearish over these counters.
Financial Technologies fell another 23% as crisis over National Spot Exchange has dealt to commodity investors sentiments. Power Grid Corp fell 11% after firm announced plans to dilute equity to fund its investment plans.
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