Stocks were rallying until the market was hit by an S&P warning report. Fact is, the S&P report was available since 8th June. It was used as an excuse by market players to book profits, thus ending the longest run of the markets since January
Indian stock markets, which were rallying till late afternoon today, used the Standard & Poor's (S&P) report in the afternoon trade, mostly to book profits. The BSE Sensex, which had gained 754 points in the last five straight sessions, opened higher in the morning and advanced 175 points to touch a day's high of 16,893.
However, citing a report from S&P which said slowing GDP growth and political roadblocks to economic policy-making are some worrying factors for India, market players started booking profits in the afternoon trade resulting in markets ending below its last closing.
Surprisingly, S&P's report titled “Will India Be The First BRIC Fallen Angel?” was there on the ratings agency's website since 8th June, and yet Indian market started losing its gaining streak only after the media release in the country. According to sources, the report was accessible only for paid subscribers of S&P. The subscription ranges from $100 to $500. However, it seems that not a single media house in India is subscribed to these reports; otherwise, they would have given a “breaking news” on 8th June itself. In any case, institutional investors subscribe to such reports and after all, they are the ones who move the market.
S&P’s latest warning came less than two months after it cut India's credit rating outlook to ‘negative’ from ‘stable’ due to the country's lower GDP growth prospects and the risk of erosion of its external liquidity and fiscal flexibility.
Earlier in the day finance minister Pranab Mukherjee said 2012-13 would be the turnaround year for the economy. Highlighting the positives in the economy, Mr Mukherjee said interest rate cycle has been reversed and there is growth in mining sector, turnaround in investment growth rate and there are predictions of normal monsoon, besides decline in crude oil prices. “All these factors should help in recovery of domestic growth momentum,” he said.
Coming back to the stock market, last week it closed with a gain of about 5%, its longest gaining spree since January this year. Last week the Sensex jumped 754 points to settle at 16,719 and the Nifty climbed 227 points at 5,068.
On Monday, the Sensex rose by over 164 points in the early trade on increased buying by funds and retail investors, supported by recovery in the rupee and a firming trend in Asian markets. The wide-based National Stock Exchange index Nifty moved up by 47 points or 0.93% to 5,115.40 in early trade.
Asian shares rose today after finance ministers of the Eurozone nations, in a emergency conference call last week, agreed to lend Spain up to 100 billion euros to stabilise its banks, relieving markets that had feared for the country's fiscal collapse.
Those who bought last week should book profits on the very first day of the week as there is a possibility that we might see a dip (till mid-week)
S&P Nifty close: 5068
Short Term: Up Medium Term: Down Long Term: Down
The Nifty opened sharply lower as expected and marginally breached the low of 4,788 points (as envisaged last week) where the shorts got trapped. The Nifty briefly dipped below the R2 level of the week from where a counter attack by the bulls saw the Nifty recover smartly to engulf the entire last week’s candle, thus forming an “engulfing bullish line” pattern. This implies that a temporary bottom lasting for at least a couple of weeks more is in place The volumes were however almost the same as last week implying that this rise is also corrective in nature even though it could survive for a few weeks more. This week the Nifty closed almost at the high of the week, gaining a whopping 227 points (+4.68%).
The sectoral indices which outperformed were CNX PSU Bank (+7.76%), CNX Infra (+7.71%), CNX Realty (+7.26%), CNX Finance (+6.27%), CNX Media (+6.06%), CNX Auto (+5.50%) and CNX Energy (+4.92%) while the gross underperformers were CNX FMCG (+1.90%), CNX IT (+1.23%) and CNX Pharma (+0.92%). The weekly histogram MACD gained further last week but continues to be below the median line implying that rallies should be treated as corrective in nature.
Here are some key levels to watch out for this week
As long as the S&P Nifty stays above 4,974 points (pivot) the bulls need not worry. They should use 4,932 as a stop loss on longs.
Support levels in declines are pegged at 4,864 and 4,660 points.
Resistance levels on the upside are pegged at 5,178 and 5,288 points.
Those who bought last week as was advised by us should book profits on the very first day of the week as there is a possibility that we might see a dip (till mid-week). If this decline comes close to last Friday’s low or around the above-mentioned support level one can think of venturing long for another small rise as this overall recovery could last till the third weekend of this month. However the crucial resistance area during this time frame is pegged between 5,185-5,275 points where one should be looking for exiting opportunities only.
(Vidur Pendharkar works as a consultant technical analyst & chief strategist at www.trend4casting.com)
The government wants to hold 51% is PSBs and is inflexible about it. It will soon find out the flip side to this, when asked to put in capital to either maintain this stake or force banks to give up growth
The criticality of operational flexibility and functional autonomy for public sector banks (PSBs) in the context of market driven economy, and competitive challenges engendered by growing internationalisation is dealt with incisively in the “Report of the Committee on Banking Sector Reforms 1998” headed by M Narasimham, a former governor of the Reserve bank of India (RBI) and a distinguished economist. (Incidentally an earlier committee called “Committee on Financial System [CFS] 1991” was also headed by M.Narasimham and hence the report of 1998 is often referred to as Narasimham II).
Narasimham II stated that, “No discussion of the structural issues would be complete without referring to the future of organizational pattern of our public sector banks. This is also closely related to the issue of autonomy in their functioning” (para 5.22, Chapter V –underlining added) which is relevant to recapitalization of banks. The committee pointed out that the banks would need at regular intervals capital infusion to leverage on to capture expanding business opportunities and to meet Basel committee stipulations, which the central government’s budget might not be able to provide because of multifarious demands on its resources. Narasimham II therefore concluded that PSBs would have to raise capital from the market which would be beneficial in other respects as well. To quote, “Accessing the market would engender a discipline of its own in terms of performance which would enhance shareholder and enterprise value.” [op.cit.5.29] Holding the view that government’s dominant ownership would not be conducive to raising equity from the market, it recommended dilution of government holding to 33%.
The successive governments—one led by the NDA and the other two led by UPA I&II, however, have assured the Parliament that the government stake would not be allowed to go down below 51%, which in effect could mean ‘denationalisation’. The implication of this policy assurance is that the government would have to bear increasing burden of capital infusion into PSBs to meet capital adequacy stipulation even as it is constrained by other fiscal considerations. If the government finds this difficult to fulfill, the banks would have to reconcile themselves to stunted growth of business and operations. Sensing this looming prospects, the RBI in its ‘Report on Trend and Progress of Banking in India 2009-10’ cautioned that 11 out of 21 PSBs were very close to the floor of 51% shareholding and that, “this raised the important issue of recapitalization in order to ensure continued credit creation by PSBs if the statutory floor of 51% for government shareholding had to be maintained’ (op.cit. Paragraph 4.65, Chapter IV). The impact of sticking with the inflexible policy of holding a minimum of 51% of shares in all the PSBs will soon unravel itself.
It must be said to the credit of the Government of India, ministry of finance that following the Budget speech by the then finance minister, it came out with detailed directions on 22 February 2005 on the issue of grant of autonomy to PSBs which is known as “Managerial Autonomy for the Public sector Banks”. This document spelt out the clear demarcation between “the roles of owners, the board of directors and the executive management”. It went on to state that the “The objective is to ensure that banks function on sound principles of corporate governance. The key issue is to design a framework in which government will exercise its ownership rights without transgressing into the management functions of the PSBs”. For the stronger banks, autonomy is granted in 12 different areas while others have freedom in eight areas of operations in addition to the existing ones. PSBs could not have asked for more but in the recent past, how this autonomy has come to be chipped away is dealt with in later paragraphs.
In 2005 the government owned 100% shares only in four out of the 19 nationalised banks. At present in all the nationalised banks, and IDBI Bank and State Bank of India i.e. PSBs, the government has less than 100% holding; in almost 14 of them the private shareholding exceeds 30%. The 2005 document on Managerial Autonomy showed sensitivity of the government to the changing pattern of ownership; it is worthwhile quoting from this document: “The existence of private shareholders in the PSBs imposes a responsibility on the government, as the majority shareholder, to enhance shareholder value and protect minority shareholders’ rights. The government will create an environment conducive for PSBs to raise additional funds from the market for meeting the Basel II requirements and to respond effectively to emerging competitive pressure”.
The private shareholders are allowed to elect one director for each 16% of the holding. In practice, the PSBs are able to persuade the institutional shareholders who represent the bulk of private shareholding to vote for the candidates indicated by them. Not infrequently the government informally advises the PSBs the names of candidates whom they want to show favour; this sometimes compromises the independence of such a “shareholder director” as he/she would remain obliged to the government rather than to the private shareholders or even to the bank. Incidentally, it may be mentioned that the PSBs have so far not faced shareholder activism questioning the preferential treatment of public sector borrowers; some of such conventions might be difficult to defend as commercial decisions. The recent legal challenge initiated by The Children’s Investment Fund management [TCI], with just 2% shareholding against Coal India should be a warning to PSBs, more so to the government “against transgressing into the management functions” (please see quote in paragraph four above).
(A Banker is the pseudonym for a very senior banker who retired at the highest level in the profession.)