Nifty to move in the range of 4,635 and 4,855
Nervousness ahead of the Reserve Bank of India’s (RBI) quarterly policy review tomorrow induced a high degree of volatility in the market, but a recovery in the second half of trade reduced the losses. Although the National Stock Exchange (NSE) saw a volume of 59.98 crore shares, the highest in past six trading days (including today), the Nifty moved only 17 points. Yesterday we had mentioned that if the index breaches 4,750, the fall may extend to 4,660. The index went well below the level of 4,750 and almost touched 4,660. However, it made a smart recovery in the post noon session. If the index breaches its today’s low, we may see it touching 4,635. But, if the RBI’s signals are seen as positive, we may see the benchmark going up to 4,850.
The market extended its losses into the second day on economic concerns and continuing worries about the European debt crisis. While headline inflation for November eased to 9.11%, investors were still cautious as other indicators pointed to a marked slowdown in the economy. Also, Italian funding costs reached a new euro era record at auction on Wednesday, casting doubts on any speedy resolution of the crisis. The Nifty opened 50 points down at 4,713 and the Sensex declined 142 points to 15,739 at the opening bell.
The early decline led all sectoral indices lower with metals and auto leading the pack. Trade remained choppy ahead of the announcement of the weekly food inflation numbers with the indices falling to their intraday lows at around 11.10am. At the lows, the Nifty touched 4,674 and the Sensex retracted to 15,596.
Food inflation falling to a nearly four-year low of 4.35% for the week ended 3rd December provided the much-needed support to the market, which moved upwards after the announcement. The indices almost ventured into the green around 2pm on select buying but selling pressure put a cap on the gains.
Nervousness ahead of the Reserve Bank of India’s quarterly policy review tomorrow pulled the market down once again. A short while later the market scaled its intraday high with the Nifty touching 4,769 and the Sensex at 15,908.
Finally, intense volatility ensured that the market close in the negative for the second day. The Nifty settled 17 points down at 4,746 and the Sensex ended trade at 15,836, a loss of 45 points.
The advance-decline ratio on the NSE was 434:1235.
The broader indices lagged behind the Sensex today as the BSE Mid-cap index closed 1.11% lower and the BSE Small-cap index fell by 1.52%.
In the sectoral space, BSE Fast Moving Consumer Goods (up 0.61%); BSE Power (up 0.56%) and BSE Oil & Gas (up 0.46%) were the noteworthy gainers. On the other hand, BSE Capital Goods (down 1.91%); BSE Consumer Durables (down 1.62%); BSE Auto (down 1.23%); BSE Bankex (down 0.98%) and BSE TECk (down 0.93%) were the top losers.
Tata Power (up 4.09%); Coal India (up 3.83%); Hindustan Unilever (up 2.80%); NTPC (up 2.02%) and Jaiprakash Associates (up 1.48%) were the key gainers in the Sensex list. The major losers were Sterlite Industries (down 3.96%); Bharti Airtel (down 3.40%); BHEL (down 2.48%); Tata Motors (down 2.35%) and State Bank of India (down 2.25%).
The Nifty was led by Tata Power (up 4.90%); Coal India (up 4.18%); IDFC (up 3.80%); Power Grid Corporation (up 3.17%) and HUL (up 3.03%). The laggards on the index were Ranbaxy (down 4.44%); Sterlite Ind (down 3.91%); Sesa Goa (down 3.59%); Bharti Airtel (down 2.91%) and SBI (down 2.60%).
Markets in Asia settled down on economic concerns within the region and across the globe. The Chinese benchmark dropped over 2% after HSBC’s flash PMI reading for December fell to 49—signalling a slowdown in manufacturing activity. Besides, Japanese business mood soured in the three months to December, according to the central bank's tankan survey. The December tankan’s sentiment index for big manufacturers worsened to minus 4 in December from plus 2 three months ago, indicating a strong negative outlook.
The Shanghai Composite tanked 2.14%; the Hang Seng declined 1.78%; the Jakarta Composite shrank by 1.33%; the KLSE Composite fell by 0.87%; the Nikkei 225 retracted by 1.66%; the Straits Times lost 1.39%; the Seoul Composite slipped 2.08% and the Taiwan Weighted tumbled 2.28%.
Back home, foreign institutional investors were net sellers of stocks amounting to Rs140.13 crore on Wednesday, whereas domestic institutional investors were net buyers of shares totalling Rs449.59 crore.
Pharma major Strides Arcolab’s wholly-owned subsidiary Onco Therapies, has received approval from the US health regulator to market cytarabine injections, used in the treatment of cancer, in the American market. According to IMS data, the US market for cytarabine is worth nearly $12.3 million. Strides settled 3.84% to Rs398 on the NSE.
H&R Johnson, a division of Prism Cement, today said it is entering the luxury sanitary-ware business, with plans to achieve revenue of Rs270 crore from the segment in the next two years. The company, which makes tiles among other products, said as part of the plan, it will launch premium bathroom products under the ‘Johnson Intellimate’ line and luxury sanitary-ware as part of the ‘Johnson Senso’ collection. Prism Cement fell 1.82% to close at Rs40.40 on the NSE.
Magma Fincorp, in order to expand its business portfolio, is entering into a new business initiative for which the company has received the requisite approval. The company’s board has passed an enabling resolution to enter into gold loan and housing finance business. The stock tumbled 4.53% to settle at Rs50.60 on the NSE.
While there is much political criticism of black money stashed abroad, many Indians are now waking up to the possibilities of bringing back money saved abroad without violating the Indian laws
Every political party, in particular, the Bharatiya Janata Party (BJP) is criticising the government of allowing black money to be stashed abroad. But there is more to this practice of Indians saving or investing money abroad over the years. There is much stress in the economies and markets in foreign countries, and assets acquired abroad in earlier years by Indians are sometimes depressed now. Many Indians are eager to bring the money back to India, if the government would permit it within the existing laws in India. These issues were discussed in a session by international investment and taxation expert Anil Harish at a Moneylife Foundation seminar on Tuesday, 13 December 2011.
Simultaneously, the Indian government is also trying to get a fix on overseas assets of Indians and exploring the possibility of bringing them under the tax net. Recently, an employee of the foreign bank HSBC gave a list of 700 names of Indians with their overseas bank account particulars to the French government. This was forwarded to the Indian government. The list was taken up for investigation by the Income Tax department. It was found that money stashed abroad could be in trusts, companies under trusts, personal accounts of individuals and numbered accounts of individuals in foreign banks. The I-T department went in for search and seizure operations in some cases of resident Indians and also sent notices to the account holders in the case of non-resident Indians. This is causing tension to Indians, who suddenly have to answer questions on assets abroad.
One example that Mr Harish narrated is of a non-resident Indian, who was questioned by the I-T department. He agreed that he had overseas accounts in London, America and Geneva. The officer wanted to know more about the HSBC account in Geneva. The non-resident admitted that he had $2.5 million in that account and the officer politely corrected him that there was $2.4 million in the account. Clearly, the officer already had the information from the French government through the HSBC employee.
Indians with foreign accounts are being questioned on whether the money emanated from India and whether the income was accrued in Indian transactions or operations. The government is questioning them whether the old remittances are legal and whether there is any tax liability which has been avoided. If found out, these accounts would also come under the Indian government’s tax net.
The Indian government has already given an undertaking to the Supreme Court that there would be no more amnesty schemes to bring back black money saved abroad. With foreign economies already in difficulty, Indians are looking for creative ways to bring back such money back into India legally.
Mr Harish came up with the illustration of a client with money saved abroad, who wanted to bring it back to India. He had litigation with a relative and he was eager to comply with the tax laws and bring the money back. It related to a remittance of $1 million made in the year 1999. By the year 2004-05 it had increased with interest to $1.2 million and by now to $1.5 million. To do so, his approach was to pay income tax in India for the $300,000 of interest income from 2004-05 to now, and if required pay the penalty for late payment, and to bring back the $1.5 million. The I-T department usually limits its investigations to seven years of returns filed by the individual.
Giving an international flavour, Mr Harish referred to the USA, where there is a Voluntary Disclosure Scheme for overseas accounts. Even if there is no tax liability, there is need to disclose the existence of the accounts and to give balances over a period of time. Not complying with the law could lead to the payment of penalty of 25% of peak balances in such accounts from the year 2003.
Thus, there is much excitement and activity in India and abroad, to both investigate money saved abroad, and to bring it back to India, by complying with the laws of the country.
While WPI inflation moderated in November, core inflation as measured by non-food manufactured WPI inflation is still above the RBI's comfort level. This may make the central bank to take a pause after increasing repo, reverse repo and CRR rates 13 times since March 2010
The Reserve Bank of India (RBI) is most likely to keep policy rates unchanged at its meeting on 16th December, say economists. They feel that while wholesale price index (WPI) inflation has moderated in November, core inflation as measured by non-food manufactured WPI inflation, is still above the RBI’s comfort level and this may make the central bank to take a pause and keep repo, reverse repo and CRR rates unchanged.
“Given the balance between inflation and growth, we expect the RBI to hold the policy interest rate steady over the remaining months of the current fiscal. We think cuts in the repo rate could begin in mid-2012. We assign only a small probability to an easing in the repo rate before second quarter of 2012, unless there is a major deterioration in global economic and financial market conditions,” said Barclays Capital in a note.
In October, the RBI, for 13th time since March 2010, increased repo (the rate at which the RBI lends money to banks) and reverse repo (the rate at which the RBI borrows from banks) rates by 25 basis points (bps) each to 8.5% and 7.5%, respectively to control inflation. The series of rate hikes has cumulatively increased interest rates by 525 bps in the last 20 months.
Expressing similar views, Goldman Sachs, in a research report, said, “While we continue to believe that sequentially falling inflation and much weaker growth will prompt the RBI ease monetary policy, our expectation of the sequence of easing remains first injecting liquidity through open market operations (OMOs), which the RBI has been doing, then cut the reserve requirement ratio of banks in January, followed by repo rate cuts in March 2012. As such, we assign only a 30% probability to a cash reserve ratio cut on 16th December. We continue to expect the RBI to cut policy rates by an above-consensus 150 bps in 2012.”
WPI inflation moderated to 9.11% year-on-year (y-o-y) in November from 9.73% in October, slightly higher than market expectations due to sharp deceleration in food inflation and stable manufacturing inflation. However, non-food manufactured inflation (which the RBI refers as core inflation) increased in November to 7.9% from 7.6% in October due to an increase in the prices of metals (1.5% month-on-month or m-o-m), chemicals (0.4% m-o-m) and non-metal minerals (0.9% m-o-m).
For the week that ended on 3rd December, food inflation fell to a nearly four-year low at 4.35% reflecting a decline in prices of essential items like vegetables, onions, potatoes and wheat. Food inflation, as measured by the WPI, stood at 6.6% in the previous week. It was recorded at 10.78% in the corresponding period last year. This is the lowest rate of food inflation since the week ended 23 February 2008, when it stood at 4.28%.
A big headache for Indian policymakers at the moment is the unrelenting slide in the rupee. With the dollar in great demand and macro-economic fundamentals weak, the pressure is likely to continue on the Indian currency. Continued weakness in the currency is pushing up the cost of imports like edible oil, fuels and metals. For example, while the global crude oil prices rose by nearly 20% in November 2011 compared to a year earlier, the rupee price of oil shot up by around 40% due to currency depreciation.
Although India is a relatively closed economy, the rupee is a pro-cyclical currency and cyclical challenges are likely to outweigh seasonal positives into first quarter of 2012. Analysts expect the rupee to weaken further due to growth concerns and capital outflows. “We expect little near-term relief for the trade deficit, as exports slow and the reduction in the import bill is limited by oil imports and investors’ huge appetite for gold. As such, we do not expect rupee strength to resume until economic expectations bottom out, spurring portfolio flows back into Indian markets,” said Standard Chartered Research in a note.
Recently, there has been much debate about whether the RBI should cut the cash reserve ratio (CRR). “The still-elevated November inflation rate will offset market pricing of immediate CRR cuts by the RBI, despite the lower lower-than-expected industrial production numbers, as well as tight liquidity conditions. We continue to expect the RBI to inject liquidity via OMOs and not via CRR cuts over the near term—until March 2012 under our base case—as CRR cuts would likely stoke inflation expectations, which are just beginning to fall,” added Barclays Capital.
The liquidity deficit in the banking system of Rs880 billion, well above the RBI’s comfort level of Rs600 billion has increased expectations of a CRR cut from its current level of 6%. According to Standard Chartered, the RBI will be in no hurry to signal a change in stance this week. “Following recent comments from the RBI that the CRR is also considered a monetary policy tool, a cut in the CRR appears unlikely. In terms of supporting banking-system liquidity, we expect the RBI to continue with its OMO. Any rate cuts will thus have to wait until second quarter of 2012 when WPI inflation cools to 6.5% to 7%,” Standard Chartered said in a report.
The government and the RBI have accepted that high interest rates may hurt the country’s growth prospects, but the apex bank has underlined that bringing inflation under control is its major agenda.
The fall in food inflation comes as a silver lining for the government at a time when the economy is experiencing a slowdown, with GDP growth dipping to 6.9% in the second quarter, the lowest rate of expansion in over two years. Industrial production has also witnessed a contraction, with output shrinking by 5.1% in October. Headline inflation, which also factors in manufactured items, has been above the 9% mark since December 2010.
The RBI has hiked interest rates 13 times since March 2010 to tame demand and curb inflation. In its second quarterly review of the monetary policy in October, the central bank had said it expects inflation to remain elevated till December on account of the demand-supply mismatch before moderating to 7% by March next year.