20 Dec 2013

“Tapering” does not equal monetary tightening

Global markets pretended to take Fed “tapering” in their stride this week after almost six months of rehearsals finally taught them that “tapering” does not equal monetary tightening. In India, the RBI left monetary policy unchanged, surprising the market and driving the Nifty up by 106 points to close 1.7% up at 6274 after trading in a range of 2.5%. Daily trading volumes rose to $2.3bn on average as FIIs sustained their buying into the year-end with net purchases of $624mil compared to net sales of $110mil by domestic investors. Volatility subsided through the week as the India VIX first traded up to 19 before settling back down towards 16 where it closed the week, two points down.  Market breadth was very strong with advances ahead of declines by four to one. Three stocks provided 60% of the upside points in the Nifty: TCS, Infosys and Reliance Industries. HDFC Bank was the only feature on the downside, suffering from having its MSCI weighting cut because FII interest hit its 49% limit. Nifty futures closed at a premium of 1.8% to cash.

Last week we noted the unexpected increase in WPI and emphasised how this was substantially due to sharp increases in fruit and vegetable prices. This week, the RBI unexpectedly held its hand on monetary policy, noting that the price of fruit and vegetables had dropped back again in December but reserved the right to act decisively if this was not reflected in the inflation numbers soon. Some analysts are forecasting WPI to pull back by up to 100 basis points on the next print. The Oil Ministry has reported that the diesel fuel subsidy cost has risen from Rs9.99/ltr to Rs10.48/ltr because of the weak Rupee and the high cost of crude oil. Five Oil and Gas development projects worth a total of $1.2bn have been cleared by the Cabinet Committee on Investment. Gold imports have fallen by 84% in value between January and November. Tesco has announced that it will invest $100mil in retail stores by increasing its interest in its joint venture with Trent Hypermarkets, a Tata Group company, to 50%. Carrefour, which has similar ambitions will be monitoring Tesco’s path through the FDI process.

13 Dec 2013

The economy is bottoming out but not yet recovering

In the past two weeks equity markets have been mostly soft in the absence of decisive data and rumbling concerns about the reduction of quantitative easing in the US. Indian markets were flat in the period, the Nifty shedding just 8 points to close at 6168 after trading in a range of 4.3%. Trading was sustained by FIIs buying a net $1n plus over the period while domestic investors continued to sell a net $814mil. Average daily trading volumes were around the lower end of recent weeks, at $2.1bn. Volatility was up in the mid-twenties at the start of the period but subsided later as the India VIX closed three points down at 18. Market breadth was negative as declining counters outnumbered advances by four to one. Concentration was also a feature with just six stocks making the major points’ contributions both positive and negative. By the end of the period, the index futures were trading at a premium of 2.2% to cash.

Domestic data points included second quarter GDP at 4.8%, a slight advance on the previous quarter suggesting that the economy is bottoming out but not yet recovering with any degree of strength. The second quarter current account deficit was $5.2bn, a sharp reduction to 1.2% of GDP as controls on gold imports combined with weak import demand to drive down imports while exports enjoyed a boost from the weaker Rupee. On the balance of payments front, portfolio outflows of $6.6bn, reflected heavy outflows from domestic debt markets: these were offset by $6.9bn in FDI. This was not enough to prevent a drawdown of about $10bn in foreign reserves; the subsidised NRI deposit scheme will really only be seen in the Q3 numbers.