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 15, 2013

Weekly Market Commentary - Dec 9 - Dec 13, 2013

As political events have turned very exciting in the country, it is the boring economics that made investors realize that it cannot remain sidelined for long. This week as investors’ sentiment over exit polls reached a climax in the state election results, markets touch their all time high on first trading session of the week. However, as the reality of the day set in, inflation blew out all the air out of the election bubble.

Sensex fell 1.3%; Nifty lost 1.5% while CNX Midcap was down by 2.1% this week.

Monday – Sensex up by 1.6%, Nifty up by 1.7%, Midcap up by 1.0%
Sensex touched a new high as market momentum built up by the exit polls continued. The main opposition and business friendly party BJP win a clear mandate in three out of four state elections strengthening its electoral prospects and chances of forming a government in the centre in May.

Tuesday - Sensex down by 0.3%, Nifty down by 0.5%, Midcap down by 0.5%
Markets saw some profit booking while new draft regulation from CERC led a major blow to NTPC earnings. NTPC went down by 11% as under new guidelines that are going to implement from April 2014, has kept RoE as the method of calculating incentives but has done some tightening on taxation and expenses front making it difficult for players like NTPC and PGCIL to maintain their current profitability.

Wednesday – Sensex down by 0.4%, Nifty down by 0.4%, Midcap down by 0.6%
Markets opened lower as weak global sentiment weighed heavily on domestic trading, but good news on CAD front led indices recoup some of their losses. India managed to lower its current account deficit as exports grew by 5.86% in November while imports dip to their two and a half year low following steep decline in gold imports. India’s CAD now stands at $9.22bn as against $17.2bn previous month.

Thursday – Sensex down by 1.2%, Nifty down by 1.1%, Midcap down by 0.6%
Markets were under selling pressure ahead of release of CPI and IIP numbers. Street estimates IIP numbers are going to signal contraction in the economy while CPI numbers will stick in 10% range prompting RBI governor to raise rates.

Friday – Sensex down by 1.0%, Nifty down by 1.1%, Midcap down by 1.4%
Worse than expected CPI numbers took its toll on the Indian markets when it recorded its biggest weekly fall. CPI for November came at 11.24% vs. street estimates of 10% range raising the fear of increase in interest rates. Street is now estimating a 25bps hike in interest rates on Dec 18. The market has pared all gains made on Monday after state elections results announcement.

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, September 15, 2013

Weekly Market Commentary - Sept 9 - Sept 13, 2013

Receding fears of war with Syria led to cooling of oil prices that in turn led to strengthening of rupee against the global currencies. Rupee also gained strength as FIIs continued to buy Indian shares after newly appointed RBI governor Raghuram Rajan charted out plans to get the country out of its current mess. Sensex gained 2.4%, Nifty gained 3.0% and CNX Midcap was up by 3.4% this week.

Monday – Markets closed on occasion of Ganesh Chaturthi

Tuesday - Sensex up by 3.8%, Nifty up by 3.8%, Midcap up by 1.8%
Markets remained buoyant from last week sentiment boost they received from Raghuram Rajan appointment and his maiden speech as RBI governor. Global markets also took respite from the news that Russia has persuaded Syria to put its chemical weapons under international inspection, which worked to shelve the fears of US strike on Syria and led to global rally in stocks.

Telecoms were the major gainers today as TRAI reduced the base price by 37%, from Rs. 2,379cr to Rs. 1,496cr per MHz of pan India spectrum. TRAI also recommended that a flat spectrum usage (SUC) of 3% of gross revenue from 2-8% earlier. Telecom companies are expected to save around 60-80,000cr over a 20-year period.

Wednesday - Sensex up by 0.0%, Nifty up by 0.3%, Midcap up by 1.6%
Markets opened lower as some investors rushed to book profits after previous day’s rally, which was biggest gain in Sensex in four years. Market recouped its losses as day progressed as tension over Syria eased leading to cooling of oil price momentum. Also, consistent recovery in rupee is helping boost the Indian investor sentiment.

Thursday – Sensex down by 1.1%, Nifty down by 1.1%, Midcap down by 0.7%
Investors turned a little cautious and booked profits ahead of IIP and CPI inflation data release expected on Friday.

Friday – Sensex down by 0.2%, Nifty down by 0.0%, Midcap up by 0.7%
Stocks tumbled after PM’s economic panel raised its doubt over Govt. achieving its fiscal deficit target of 4.8% of GDP in current year. Investors also continued to cut positions ahead of US Fed meeting and RBI first meeting under Rajan next week. Market is keenly awaiting Fed’s decision on tapering and RBI’s response to it.

Bulls did get some respite in form of better-than-expected July 2013 IIP data (+2.6% yoy) and fall in retail inflation to 9.52% in August from 9.64% in July. August WPI data, an anchor used by RBI to decide on its policy decisions, will release on Monday.


Saturday, September 7, 2013

Weekly Market Commentary - Sept 2 - Sept 6, 2013

Raghuram Rajan joined at a time when India is reeling under worsening deficit situation, falling forex reserves (lowest in three years) and deteriorating investment climate. Markets gave a warm welcome to his taking charge as it expects liberal policies and easing of monetary policies. Sensex zoomed 3.5% while Nifty gained 3.8% and CNX Midcap was up by 2.7% this week.

Monday - Sensex up by 1.4%, Nifty up by 1.4%, Midcap up by 1.7%
Markets continued their positive momentum as global stocks rose amid Chinese PMI data increase. Recent spate of reforms introduced in the economy by Finance Minister has buoyed the investor sentiment.

Tuesday - Sensex down by 3.4%, Nifty down by 3.8%, Midcap down by 2.3%
Ongoing crisis in Syria reached a new low as Russia reported missile firing by Israel on its ally. The news led to oil zooming, rupee falling and bloodbath in domestic markets. Indian market was also impacted by S&P credit downgrade warning of Indian economy owing to rising deficits and weaker currency, which again crossed 68 levels against the dollar. The rating agency said there is one in three chances of rating downgrade. To add to India’s misery, Goldman Sachs also cut India’s growth forecast to 4% from 6% earlier and predicted fall of rupee to 72 against the USD.

Wednesday - Sensex up by 1.8%, Nifty up by 2.0%, Midcap up by 1.0%
Markets recovered after previous day’s carnage with some value buying across the industries. The missile firing reports also turned out to be tests rather than war cry as Russian media reported. Realty stocks fell as RBI asks banks not to disburse the full loan amount for an under construction property. It said loan disbursal should be linked to construction schedule of the property.

Thursday – Sensex up by 2.2%, Nifty up by 2.7%, Midcap up by 1.7%
Markets gave a big welcome to Raghuram Rajan as he took charge of RBI. Rajan hit the ground running and announced steps to defend the falling value of Indian currency and measures to unshackle the overall economy. You can read his full speech here.

Friday – Sensex up by 1.5%, Nifty up by 1.6%, Midcap up by 0.6%
Overall market sentiment remained positive as RBI announcements indicated strengthening rupee and easing monetary tightening introduced by RBI recently.


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.


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.


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.


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.

Saturday, July 6, 2013

Weekly Market Commentary - Jul 1 - Jul 5, 2013

Indian markets have become more sensitive to global and domestic macros rather than stock fundamentals in recent times, which is in fact good news for stock pickers who follow bottom up strategy rather than top down. Sensex ended this week up 0.5%, while Nifty gained 0.4% and CNX Midcap was up by 0.5%.

Monday - Sensex up by 0.9%, Nifty up by 1.0%, Midcap up by 2.3%
Markets continued their bullish momentum from previous week as govt paced up the reforms. The recent gas price hike will attract more investments into country's oil and gas space. Investors are closely watching every govt move and expect more reforms before elections. News of above average monsoon expectations also kept the mood buoyant.

Tuesday - Sensex down by 0.6%, Nifty down by 0.7%, Midcap down by 0.6%
Investors booked profits after 3 days rallies in the stocks. Almost all sectors end up in red. Tata Motors went down 1% after company announced 16.4% fall in domestic sales of Commercial and Passenger vehicles to 48,712 units and 34.2% decline in exports in June 2013 over June 2012.

Wednesday - Sensex down by 1.5%, Nifty down by 1.5%, Midcap down by 2.1%
Markets slipped as rising crude prices and weak rupee brought back the focus on current account deficit. Ouster of Egyptian President Mohammad Morsi and subsequently army coming back to power has raised tension in one of the biggest Middle East countries, which led to increased volatility in crude prices. On the other hand, FIIs continued to offload their rupee assets further deteriorating the rupee exchange rate against the dollar.

Thursday - Sensex up by 1.2%, Nifty up by 1.1%, Midcap up by 0.7%
Investors turned to value buying, as sentiment has turned positive after recent reform announcement. Also, falling rupee has turned investors bullish on IT stocks. Meanwhile, the government on Wednesday finally cleared an ambitious Rs 1.25 lakh crore food security plan, promising subsidized food to two out of every three Indians. The move will help the Congress party gain significant political support in the run-up to the 2014 general election, although it may stretch the government's fiscal deficit. Food bill is expected to increase from 85,000 crores to 1.5 trillion rupees.

Friday - Sensex up by 0.4%, Nifty up by 0.5%, Midcap up by 0.3%
Markets went up globally as central bankers in Europe assured investors that there is no hurry to wind down stimulus. Overall, mood in Indian markets remained positive though FIIs has turned net sellers amid increasing rupee volatility.

Saturday, June 29, 2013

Weekly Market Commentary - Jun 24 - Jun 28, 2013

There is a thing with democracies. They squabble over issues/decisions, slows down progress, are mostly unable to reap the benefits of good times and sometimes take action to soothe one interest group which works as detrimental to rest of the country, before realizing it is too late. More often than not, reforms happened with the gun pointing at their head. It was balance of payment crisis in 1991, this time rising deficits and sliding rupee did the trick. Govt finally got its act together and bite the bullet over gas pricing. The war is not yet over as markets are looking at rising external debt. 44% of total external debt is maturing in the next one year which, if not restructured, will eat into 59% of total foreign exchange reserve country has. Chart below, from Livemint, illustrates the situation better.
Sensex ended this week up 3.3%, while Nifty gained 3.1% and CNX Midcap was up by meagre 0.3%.

Monday - Sensex down by 1.2%, Nifty down by 1.4%, Midcap down by 2.6%
Market extended their losses from previous week as the global stocks continue to slid post Fed announcement of curtailing its bond buying program. Market seems to be ignoring the ifs and buts in the announcement and is running havoc with no plan in sight. Markets were also nervous when Chinese central bank made comments to the effect that liquidity in the system is reasonable, when China is facing liquidity squeeze. Central bank suggested fine tuning the system, which market assumed as reducing liquidity. Shanghai went down more than 5%.

Indian markets mirroring their global peers, are also under pressure due to rising CAD worries and fall in currency value. Brokers are of the view that FIIs have sold over $5 billion of debt and equities in June so far.

Tuesday - Sensex up by 0.5%, Nifty up by 0.3%, Midcap down by 0.6%
The Indian stocks went up in early trade as China tries to soothe investors’ nerves, short covering as F&O expiry nears. Markets also bought oil and gas stocks ahead of pending decision on gas price revision. Gas price were supposed to be revised previous week itself but the decision was deferred as Oil Minister was out for an official tour.

Wednesday - Sensex down by 0.4%, Nifty down by 0.4%, Midcap down by 0.0%
The Chinese central bank move to provide liquidity to some parts of its financial system to stabilize money market rates cheered the global market. Indian markets had a rangebound session as good news from China, short covering due to nearing F&O expiry was completely offset by rupee playing a spoilsport sliding below 60/$ level.

Thursday - Sensex up by 1.7%, Nifty up by 1.7%, Midcap up by 0.7%
Sensex and Nifty rallied as investors cheered the downward revision on US GDP data from 2.4% to 1.8%, which eased the concerns of reduced Fed spending. RBI also took advantage of this news and advanced its release of CAD data by one day. India's March quarter CAD came at $18.1 billion, 3.6% of GDP vs. consensus estimate of $21.7 billion or 4.4% of GDP. Corresponding figure for December quarter was 6.7%. The FY13 CAD stood at $88.2 billion and the Q4 Balance of Payments (BoP) stood at a surplus of $300 billion versus a $600 billion deficit year-on-year. Short coverings on the last expiry day of June series also buoyed the market.

Friday - Sensex up by 2.8%, Nifty up by 2.8%, Midcap up by 2.9%
Indian markets rallied as govt got its act together and approved doubling of gas prices from current $4.2/mmbtu to $8.4/mmbtu. The gas price decision was in limbo for several months now as various govt ministries, such as fertilizer, power and oil quarrel over the impact on their respective sectors. This decision was in tandem with the recent approval to power producers to pass on the imported coal cost to the consumers. The new gas pricing will get into force from April 1, 2014 and will work to attract investments in the sector as it makes several projects, big or small, across the country even more economical.

Rupee also rebounded to 59 levels after govt announced reforms to attract investments in the country and reduce country's dependence on imported gas (fuel). Govt has also initiated towards setting up of a coal regulator to settle disputed over quality and quantity of coal sold in the Indian markets. The poor quality of coal has led to squabbling between the country's premier energy producer NTPC and largest coal producer Coal India.