The causes and conditions for a potentially swift decline in interest rates are not any different from those that led to their swift rise, says Nomura
Interest rates can potentially fall from here as swiftly as they rose in the first place since mid-May, according to Nomura Financial Advisory in its research note on domestic interest rates. However, investors must remain cautious on equities – current valuations do not offer much comfort given high growth and earnings risks. It is desirable to be sellers on excessive market strength. The causes and conditions for a potentially swift decline in interest rates are not any different from those that led to their swift rise,
According to Nomura, if one goes back to the beginning of the third week of May to just before when the Ben Bernanke jolted global markets on 22 May with the phrase “in the next few meetings”, referring to the potential scaling back of QE3 — that he rolled out in September 2012 in sync with ECB’s (European Central Bank) own outright monetary purchases or OMT — in the short-term, the 10-year government bond yield in India was at 7.1% and falling. This downward trajectory in yields was being driven by fast-weakening growth expectations and an appreciably lower inflation rate. The RBI (Reserve Bank of India) had a distinct easing bias then, having cut policy rates by 75 bps since the beginning of the year.
The initial leg of the sharp rise in bond yields (see chart below) was in reaction to heavy selling of bonds by foreigners as the global carry-trade unwind worked itself through emerging markets, dragging the 10-year yield up 40 bps through June to 7.5% in mid-July, points out Nomura.
While Nomura expects that a fall in rates from here could well surprise equities, the recent sharp market rally — the Sensex is up more by about 15% since the August-end bottom — has taken the market back to pre-taper levels of mid-May (see chart below).
On Friday, we suggested that Nifty will enter a corrective period. A few more indications are needed to confirm this.
On a lower volume of 54.14 crore shares on the National Stock Exchange (NSE), the Nifty fell for the second consecutive session. The fall on the Sensex and Nifty has come as an after effect of the surprise move by Reserve Bank of India (RBI) of raising the key policy rate on Friday and the statement made by James Bullard, president of Federal Reserve Bank of St. Louis, that the US Fed could make a small stimulus reduction at its next meeting in October.
The Sensex and Nifty opened lower at 20,061 and 5,946. Immediately after hitting the day’s high of 20,200 and 5,989 the benchmarks fell. In the last hour of the trading session, the indices hit their days low and made a marginal recovery from that level. The Sensex hit a low of 19,826 and closed at 19,901 (down 363 points or 1.79%), while the Nifty hit a low of 5,871 and closed at 5,890 (down 122 points or 2.04%). A fall below 5,840 in Nifty will confirm that a serious downtrend has begun.
Except for IT (up 0.83%) and Metal (up 0.18%) all the other indices on the NSE ended in the negative. The top five losers were PSU Bank (5.70%); Realty (4.49%); Bank Nifty (4.45%); Finance (3.93%) and Infra (2.74%).
Of the 50 stocks on the Nifty, 9 ended in the green. The top five gainers were Sesa Goa (2.92%); HCL Technologies (2.85%); Hindalco (1.80%); Hero MotoCorp (1.28%) and Dr Reddy (1.26%). The top five losers were Bank of Baroda (7.33%); DLF (7.03%); Axis Bank (6.56%); IndusInd Bank (6.44%) and Jaiprakash Associates (6.12%).
Economic affairs secretary Arvind Mayaram said that the intrinsic value of the rupee is between 58 and 60 against the dollar. He said that overseas speculators were partly responsible for the sharp fall in the currency over the past few months. He also said that a fall in bulk diesel demand this fiscal year will save the government about $1 billion. Mayaram said he expected foreign direct investment (FDI) flows of about $36 billion for the fiscal year ending on 31 March 2014, if the current trend continues. Net FDI in the first quarter of this fiscal year rose to $9 billion from $5 billion in the same period a year earlier, Mayaram said last week.
The partially convertible rupee was hovering at 62.65, weaker than its close of 62.23/24 on Friday, 20 September 2013.
As per media reports, the government has turned cautious about the proposal to increase diesel prices sharply and raise them every week as top Congress leaders and the party's allies are worried about the political fallout of such a move ahead of the festive season and elections in five states.
US indices closed in the negative on Friday. The Federal Open Market Committee (FOMC) holds a two-day policy meeting on 29-30 October 2013. Asian indices closed mainly in the negative. Straits Times, top loser, down 0.72%.
A Chinese manufacturing index rose to a six-month high in September, signaling that a rebound in the world's second-largest economy is gaining steam. The preliminary reading of 51.2 for a Purchasing Managers' Index released today by HSBC Holdings Plc and Markit Economics. The gauge was at 50.1 in August.
Trading on Hong Kong markets was delayed due to a storm and Japan is closed for a holiday. A powerful typhoon hit Hong Kong and the southern China coast on Monday, killing at least 20 people on the mainland, crippling power lines and causing flooding and gale force winds.
European indices were trading in the negative while US Futures were trading marginally in the negative.
In Europe, Chancellor Angela Merkel's conservative party won Germany's election, but finished just short of an absolute majority. Merkel's Christian Democrats (CDU) bloc took about 42% of the vote. But she might yet have to seek a grand coalition with the Social Democrats (SPD) who won about 26% of the vote. Mrs Merkel has made clear she would be prepared to work with the Social Democrats (SPD) in a grand coalition, as she did in 2005-09.
Preliminary purchasing managers' indices from euro-zone countries were a mixed bag. The September services PMIs beat expectations in both France and Germany, while the manufacturing readings missed market views and pulled back compared with August. The broader euro-zone flash composite PMI climbed to a 27-month high of 52.1. A level above 50 signals expansion.
The Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households has been tasked to develop a monitoring framework to track progress of financial inclusion across the country
The Reserve Bank of India (RBI) on Monday announced a 13-member Committee, including Vikram Pandit, former chief executive of Citibank and Axis Bank chief Shikha Sharma, to frame a 'clear and detailed' vision for financial inclusion across the country. The Committee is headed by Nachiket Mor, member on the RBI’s Central Board of Directors.
The ‘Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households’ has been tasked to develop a comprehensive monitoring framework to track the progress of financial inclusion and deepening efforts on a nationwide basis, the central bank said.
The Committee would review existing strategies and develop new ones that address specific barriers to progress and encourage participants to work swiftly towards achieving full inclusion and financial deepening, consistent with the design principles, RBI said.
The committee members are: Bindu Ananth (President, IFMR Trust); Prakash Bakshi (Chairman, NABARD); Bharat Doshi (Chairman, Mahindra & Mahindra Financial Services); AP Hota (Managing Director and CEO, National Payments Corporation of India); Sunil Kaushal (CEO, Standard Chartered Bank India); Roopa Kudva (MD and CEO, CRISIL); Zia Mody (Managing Partner, AZB & Partners); S. S. Mundra (CMD, Bank of Baroda); Vikram Pandit (former CEO, Citigroup); Ramesh Ramanathan (Chairman, Janalakshmi Financial Services) and Shikha Sharma (MD & CEO, Axis Bank). A Udgata, Principal Chief General Manager, RBI is the Member Secretary.
The central bank further said Karuppasamy and Deepali Pant Joshi, both Executive Directors, RBI will be the expert observers.
Secretarial support to the panel will be provided by the Rural Planning and Credit Department (RPCD) of the RBI.
The panel, which will submit its final report by 31st December 31, has also been given the task to lay down a set of design principles that will guide the development of institutional frameworks and regulation for achieving financial inclusion and financial deepening.