Stocks
Nifty, Sensex are still on course to head higher – Tuesday closing report
We had mentioned in Monday’s closing report that Nifty, Sensex were headed higher. The major indices of the Indian stock markets were range-bound on Tuesday and closed with small losses over Monday’s close. The trends of the major indices in the course of Tuesday’s trading are given in the table below:
 
 
Profit booking, combined with negative global cues and a weak rupee, subdued the Indian equity markets on Tuesday resulting in the key indices trading marginally in the red during the mid-afternoon session with heavy selling pressure witnessed in banking, consumer durables and capital goods stocks. The key Indian indices ended in the green on Monday, following economic reforms and higher global equity markets. Initially on Tuesday, the equity markets opened on a flat-to-positive note, in-sync with their Asian peers. The Asian markets gained on the back of increased chances of Britain staying on in the Eurozone. The island nation will go in for a referendum on this issue later this week. However, profit booking, consolidation and negative European markets dragged the key domestic indices lower. Further, investors were seen concerned about US Federal Reserve Chairperson Janet Yellen's testimony to the US Congress. The testimony can provide further cues towards the next phase of the key lending rate hikes. In its two-day policy meet last week, the US FOMC (Federal Open Market Committee) decided to maintain its key lending rates. The US Fed signalled its intention to limit the times it might increase key lending rates due to weak domestic jobs market. A hike in the US interest rates can potentially lead FPIs (Foreign Portfolio Investors) away from emerging markets such as India. Besides, lower global crude oil prices and a weak rupee eroded investors' risk-taking appetite.
 
With two more days to go for the crucial referendum on Britain's continuance in the European Union, speculation over its exit (Brexit) is making the global economy nervous and the unfolding situation is being closely watched, a top World Bank official has said. “It’s clear that the discussion around Brexit is one of several factors that is contributing to uncertainty in the global economy,” Ayhan Kose, director of the World Bank Group’s Development Prospects Group, told IANS in an e-mail interview. Kose, however, did not comment on queries over Brexit's possible impact on India. He said the event was being closely watched by the World Bank, though it does not want to speculate on the outcome. The referendum is slated for June 23. The United Kingdom represents more than 15% of European Union’s GDP (gross domestic product), 25% of its financial services activity, and 30% of its stock market capitalisation. The European Union, in turn, is a key export market and source of foreign direct investment for many emerging market and developing economies. Financial market volatility around a decision to leave the European Union could lead to heightened global risk aversion, hampering already weak capital flows to emerging market and developing economies, a report said.
 
With increasing concern over foreign institutional investors continuing to invest in emerging markets, US President Barack Obama said on Monday that investing in the US is the "best business decision" possible because this is a country of "making and tinkering, and entrepreneurship and risk-taking, and of innovation and invention". "Investing in the United States is the best business decision you can make," he told more than 2,000 business owners and executives meeting at the Washington Hilton for the SelectUSA Investment Summit. Obama noted that the US is responsible for one-quarter of global investment in research and development, and that no other country receives more direct foreign investment. Energy costs are among the lowest, and "no country has as many top universities, and no country invests more in research and development than we do," Obama said. He acknowledged, however, that advances in technology and the process of globalisation are legitimate concerns for some workers.
 
In anticipation of stable interest rates in the Indian economy, interest rates for various small savings schemes have been kept unchanged for the July-October quarter of current fiscal, the government announced on Monday. A finance ministry statement here said that the interest rate on one-year deposits for the July-October quarter of 2016-17 has been kept unchanged at 7.1%. Similarly, the interest rates on two-year, three-year and five-year time deposits have been retained at 7.2%, 7.4% and 7.9% respectively. Besides, the interest rates on Public Provident Fund (PPF), the Kisan Vikas Patra scheme and the Sukanya Samriddhi Account Scheme were kept at 8.1%, 7.8% and 8.6% respectively, the statement added. The government had announced in February that small savings rates will be set quarterly to align them with the market rate of government securities.
 
Selling pressure was there among bank stocks in Tuesday’s trading. Axis Bank closed at Rs517.45, down 1.37%; Bank of Baroda closed at Rs149.95, down 1.28%; and IndusInd Bank closed at Rs1,090.90, down 1.07% on the BSE. Other losers among banks were Federal Bank (-0.88%), State Bank of India (-0.88%), Kotak Bank (-0.81%), HDFC Bank (-0.59%), Yes Bank (-0.43%) and ICICI Bank (-0.02%) on the BSE.
 
The top gainers and top losers of the major indices are given in the table below:
 
 
The closing values of the major Asian indices are given in the table below:
 

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There are newer opinions on Rexit and they are not so charitable to Rajan

The Reserve Bank of India (RBI)'s Governor Dr Raghuram Rajan, as per his own communication to his colleagues, will not continue at the post after 4 September 2016. Following this, the domestic and global media have gone into paroxysm of lament and berated the Narendra Modi government for letting Dr Rajan go. There has been a dire prognosis of a hundred billion dollars leaving India, rupee collapsing and interest rates turning volatile. However, after the news of Dr Rajan quitting actually came out, all markets have been calm. The rupee has barely budged and stock indices are up. Meanwhile, more and more opinions are coming out that find holes both Dr Rajan’s policies and his attitude and public pronouncements.

Rajeev Kumar, senior fellow at the Centre for Policy Research in an article in the Indian Express  says, "...it is sad to see Rajan return to Chicago. However, it is not entirely the government’s fault and he would have to share part of the blame for this unfortunate situation. The most important lesson to my mind is for the government to choose a substitute who has not only the domain competence but also the ability and humility to work as an effective and a somewhat self-effacing member of India’s economic policy team. The collective aim would be to generate maximum employment growth while retaining macroeconomic stability. This can be achieved without generating so much heat or light."

Finding holes in Rajan’s textbook of controlling inflation, disclosure of all bad loans at one go and keeping the rupee artificially high that is affecting exports, Ajay Chhibber, former director general of Independent Evaluation Organisation, Government of India, says, RBI must give equal importance to growth and inflation, the central bank needs to change its policy of keeping the exchange rate appreciated, through a managed float, to contain inflation and there is a need for a more calibrated approach to current banking problems. "An RBI policy that favours importers and short-term portfolio investors is not in India’s long-term interests. Successful governors Bimal Jalan and YV Reddy followed more flexible and competitive policies, and kept as much focus on growth as they did on inflation. We need such a practical approach now, not a textbook one," he wrote in an article in the Economics Times

Meanwhile, the equity market experts have stopped painting scare scenarios and have done an about-turn about the impact of Rexit (Rajan’s exit). Nomura says, except for a small fall as a knee jerk reaction, Dr Rajan’s exit may not be negative for equities market. "We do not think that Dr Rajan's exit will mean large rate cuts or that banks will relax control on their asset quality. Of course, whether the market accepts that view, depends, to a large extent, on the new governor. A credible face at the helm of the central bank may significantly calm market jitters," it says in a report.

Nomura says it do not expect a significant correction in Indian equity market. "Recently, the Indian market has generally outperformed significantly due to visible signs of a recovery in earnings growth. The market is no longer cheap on an historical basis but neither is it very expensive and therefore was more a "buy on dips" market and we see no reason to change our view," it concluded.

Mr Kumar thinks Dr Rajan succeeded in restraining inflation was partially plain good luck and partly staunch support by the government in maintaining tight fiscal discipline. He says, "...having announced flexible inflation targeting as his preferred policy objective, Rajan was unremitting in his drive for squeezing out all inflationary expectations from the system. In this, he was lucky as global oil prices plummeted soon after he took over. One wonders the extent to which Rajan would have hiked rates, had global oil prices remained in the vicinity of $140. Food prices are an important driver of inflationary expectations. These are driven more by the supply-demand dynamics than by the interest rate policies especially when the transmission mechanism is weak. Could better results not have been achieved if the RBI and relevant government agencies worked together, behind the scenes, to address supply constraints that push up food inflation in the country and raise the price of wage goods, thereby pushing up costs? This, in turn, forced the RBI to keep interests rates high, delivering a double whammy to the industrialists as they end up suffering from both high wage and capital costs."

By accepting the new monetary policy framework underlined by inflation targeting, Mr Chhibber says, the (Indian) government accepted the idea that the RBI be allowed to give precedence to inflation over growth. "Inflation targeting is an old ‘stabilisation first’ policy that the International Monetary Fund (IMF) used to follow in the last century. But even the IMF discarded it after being criticised for hurting growth and recovery. Even if inflation targeting works in some developed economies, it is meaningless in a developing country where more than half of inflation comes from food items where supply side constraints dominate price movements. In any case, the fall in inflation is largely due to declining commodity prices, and has little to do with tight monetary policy. With commodity prices rising again, inflation will increase and the new monetary framework under inflation targeting will force the RBI to maintain — and perhaps even increase — interest rates," he added.

Mr Kumar, in his article, opined that the principal economic reason (for Dr Rajan's exit) would seem to be the continued extreme weakness in credit off-take from commercial banks, which is at 8%-9% compared with 27% in 2009. He said, "This signifies both a loss of private investors’ appetite for investment and the commercial banks’ reluctance to advance credit as their balance sheets take hard knocks in the face of unremitting pressure from the RBI to surgically clean up their loan portfolios. A government deeply concerned with generating more jobs and raising the rate of economic growth could have expected a helping hand from Rajan. Instead, the governor seemed bent upon completing the cleaning up even if it implied significant corporate and commercial banks. The danger could surely be that the damage in the short term would outweigh the uncertain positive long-term consequences."

Mr Chhibber feels that by following a very strict approach, the RBI may have ended up exacerbating systemic problems in banking. "Crafting a more nuanced approach will be vital for the next RBI governor. Once classified, the only approach will be to recapitalise the banks. Amore nuanced approach is needed to distinguish between wilful defaulters (cute bank terminology for crooks) and those where some temporary forbearance may help regain the ability to repay once the economy recovers. The strict approach makes the RBI look tough and reform-minded and against crony capitalism. But it puts all non-performing loans into the problem category. If a strict textbook approach is pursued, India could well slide into a full-blown banking crisis as the government will need extra financing of some $200 billion through an IMF programme that must be avoided. A more measured approach with tougher tools to the banks for collection to go after wilful defaulters and a careful industry-by-industry approach will help resolve sectoral issues," he says.

The impact on fixed income markets may be greater and Indian rupee could be under pressure, in Nomura's view. However, it says, nominal equities prices tend to react positively to currency depreciation as long as nothing else changes. "Indian rupee depreciation, if any, would be positive for technology stocks. Banks, ironically, may actually do well as after the RBI push to clean up their balance sheets financials underperformed the market rally overall".

Mr Chhibber further argues that the RBI has followed a policy of keeping the exchange rate appreciated, through a managed float, to contain inflation. He says, with current account deficit (CAD) under control, the real exchange rate is at the right level. But CAD has fallen because imports fell sharply and an appreciated exchange has hurt export growth. "If India is to achieve 8%-10% GDP growth, it must have a more competitive exchange rate policy. An importer lobby has emerged in India that is hurting our domestic industry and helping deindustrialisation in the country. An RBI policy that favours importers and short-term portfolio investors is not in India’s long-term interests," he stated.

The rupee is kept appreciated by inflows of portfolio capital attracted to India with higher interest rates and an RBI policy of managing an orderly float, Mr Chhibber alleges. He says, "This has allowed portfolio managers to make large profits in India over the last two years. The government has even removed the alternative minimum tax on such capital gains under pressure from the investor community. These inflows have also propped up the equity markets temporarily and will leave once the interest rates fall and the rupee is allowed to depreciate faster."

"The RBI did well to reverse the steep rupee fall in August 2013 when the taper tantrum hit India. But in hindsight, the extra interest premium it offered investors in dollar-denominated debt was probably unnecessary. The RBI will now have to redeem some $30 billion of these in September. The appointment of a new governor gives the government the opportunity to recalibrate monetary, exchange rate and banking sector policies," Mr Chhibber added.

In his article in the Indian Express, Mr Kumar also highlighted some personal issues with Dr Rajan, like the RBI Governor's attempt to combine the role of a senior policy mandarin with that of a public intellectual. He says, "I wonder how he (Dr Rajan) did not realise that this is an impossible mix. Not only did he advise the finance minister to stick to the fiscal target, which was clearly stepping over red lines, he also chose to speak publicly on the state of tolerance in the country and whether or not a strong government faces the danger of succumbing to dictatorial tendencies a la the emergency in India or Hitler’s Germany. Taking on the role of principal critic is perhaps not conducive to working as part of a team."

He says, "The government also backed down twice in the face of opposition by Rajan, first to the Financial Sector Legislative Reforms Commission (FSLRC) recommendations and second, to the creation of an independent public debt office in the ministry of finance. Moving Rajiv Mehrishi suddenly and unexpectedly out of the Department of Economic Affairs (as secretary) was also perhaps done partly with an eye to placate Rajan. What more would a government do to retain talent? The more pertinent question is perhaps why Modi took away his support during the last few months."

"Could (Dr) Rajan, an excellent networker otherwise, have become a victim of excessive adulation from the community of fawning financial analysts and breathless media anchors who in their selfish interests made him into a prima donna who was beyond all established norms," Mr Kumar wonders.

Nomura feel the frameworks put in place by Dr Rajan are likely to remain, and thus unless the new governor changes these frameworks, the credibility of monetary policy will be intact.

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COMMENTS

B. Yerram Raju

11 months ago

Add to this what Mr R. Srinivasan in his Op-Ed mentioned - the silence of Modi when the debate was triggered by Nirmala Sitaraman's Comments on his New York speech and Dr. Subrahmanya Swamy's brazen attack on Rajan. Rajan failed to balance the official candor with intellectual exuberance like several other intellectuals and he exited almost the same route. Some of his ilk escaped public debate. The loss is not truly his. Rajan said that he will get back to academics but did not say that he will go back to Chicago. Who knows he will contribute to the enrichment of academics of financial sector in India even if it is part time? It is good to be fair to Rajan for what he has done and did no less than any of his illustrious predecessors. As far as the indices go, every exit of RBI governor did bring in some ups and downs. Indices that change even with weather should be expected to fluctuate with even the changes in regulators!!

Balasubramanian Brahmadesam Canthadai

11 months ago

Having worked in RBI more than 60 years back am aware it has a quality. research department capable of analysing any problem. Any Governor gets valuable inputs.individuals donot make institutions. With my college having contributed 2 Governors YV Reddy and D Subba Rao I know

Milind Nadkarni

11 months ago

1) Whenever a leader of a team takes a different path (than his/her predecessors) in managing events / situations, s/he is bound to attract both - praise and criticism.
2)It is also easy to dissect actions and decisions taken by a leader after these have been taken and then put blame or shower praise. It is easier to act as armchair critique than to take the actions when the events are unfolding.
3) Whenever decisions are taken in a well established mature institution (like RBI), whether the originator of these is an individual or not, they get debated and discussed to examine all angles. Most of the times, the leader's ideas are improvised by other members of the team and thus they do not remain fully his / her own.
4) Approaches / decisions / outcomes taken by a team under the leadership of a team leader should get analyzed, studied and criticized but just because someone does not agree with those decisions / approaches, they do not become bad or wrong. Even if the decisions are wrong, criticizing the leader for his / her personal attributes or doubting his / her patriotism is completely wrong unless there is compelling evidence against the team leader personally having taken the decisions with vested interest.
5) We should start giving importance to qualification, academic excellence, proven track record, independent )third party) feedback about the team leader which is available in public domain, as compared to "flexibility", "people management" and "political savviness".

A RAMKRISHNA

11 months ago

Indian Economy is significantly different from other economies - both developing and advanced ones. Hence the text book theory of controlling inflation through monetary policies may not work. Also as pointed out in this article, food inflation forms a significant portion of the Consumer price index and this is more due to supply constraints and bottlenecks in the economic system and cannot be controlled by monetary policies.
The Indian banking system caters mainly to the large corporates and business houses, which forms a very small portions of the GDP. It is believed that the sales turnover of all the listed companies contributes to less than 5 % of the GDP. Even if one includes the unlisted comapnies also, it is less than 7 to 8% of the GDP. Bulk of the contribution to the GDP comes from small and medium enterprises, who are to a great extent outside the banking system. It is for this reason that the government initiative of incorporating Mudra Bank will give stimulus to this sector.
On the positive side, one has to admit that Dr. Rajan brought in a sense of discipline to the whole working of the RBI, which I am sure will not be reversed by the ne Governor.

A RAMKRISHNA

11 months ago

Indian Economy is significantly different from other economies - both developing and advanced ones. Hence the text book theory of controlling inflation through monetary policies may not work. Also as pointed out in this article, food inflation forms a significant portion of the Consumer price index and this is more due to supply constraints and bottlenecks in the economic system and cannot be controlled by monetary policies.
The Indian banking system caters mainly to the large corporates and business houses, which forms a very small portions of the GDP. It is believed that the sales turnover of all the listed companies contributes to less than 5 % of the GDP. Even if one includes the unlisted comapnies also, it is less than 7 to 8% of the GDP. Bulk of the contribution to the GDP comes from small and medium enterprises, who are to a great extent outside the banking system. It is for this reason that the government initiative of incorporating Mudra Bank will give stimulus to this sector.
On the positive side, one has to admit that Dr. Rajan brought in a sense of discipline to the whole working of the RBI, which I am sure will not be reversed by the ne Governor.

Rahul Pande

11 months ago

Why can't we do things gracefully and respect people when they demit office.Hounding Rajan by Swamy was in bad taste.

REPLY

padmashri15

In Reply to Rahul Pande 11 months ago

Totally agree with you Rahul. Whatever be the differences, need not come out in the public in a poor way, the way Swamy has done. Also rapport between Governor and Government of India has historically been poor. All the muscle flexing comes in the way of providing adequate space to the Governor. Similar were the sentiments towards earlier Governor's exit.

smmehta33

11 months ago

Only global investors, selective pro western countries media who have vested interest made Dr Rajan Superstar. Dr Rajan done some excellent work it doesn't mean he done everything right. Even today he is claiming to control inflation tight monetary policy n high interest rates are very important. If he is right than i want ask him, since many year western countries running with zero to minus interest rates still why there no inflation? Forget inflation they are facing deflation.
2nd due to very strong ruppes local industries particularly MSME are on death bed how? Strong rupee made it difficult to export and easy to import double blow.

3rd In India inflation mainly due to supply side constraints n monsoon, monsoon not in our hand but supply side improvement in our hand that can improve only by fresh investments which was killed by very high interest rates (high borrowing cost) overall his policy were more beneficial to western countries at the cost of our economy n our people

REPLY

padmashri15

In Reply to smmehta33 11 months ago

Exporters have never been in deathbed.. If you see historicallly rupee has only depreciated sharply. dollar to rupee rate of Rs 67 is never going to reverse back to 45 or 49, that it used to be before 2012.

CA Parthiban

11 months ago

India needs growth coupled with massive jobs.Drastic credit off take to push
growth engine is must.

Pulse Beat

Alcohol and Breast Cancer

IARC (International Agency for Research on Cancer),  an agency of the World Health Organization (WHO),  listed cancers of the oral cavity, pharynx, larynx, oesophagus, and liver as being “causally related to the consumption of alcoholic beverages.”A new study published in the journal, Alcoholism: Clinical and Experimental Research, by Kevin Shield and colleagues at IARC has shown that breast cancer and alcohol are very closely related. Even small amount of alcohol intake had shown a significant relation to the incidence of breast cancer. Dr Shield and colleagues have this to say in their article: “All levels of evidence showed a risk relationship between alcohol consumption and the risk of breast cancer, even at low levels of consumption. Due to this strong relationship and to the amount of alcohol consumed globally, the incidence of and mortality from alcohol-attributable breast cancer is large.”
 

Can Opioids Worsen Pain?

A new study has questioned the use of opioids, such as codeine, oxycodone, morphine and fentanyl, in treating pain. Professor Peter Grace is the lead author of the study published in the recent Proceedings of the National Academy of Science. All the previous studies that showed opioids to be the best pain-killers were all short-term studies. This is the first study that looked at chronic pain and opioid use for treating them. “We are showing for the first time that even a brief exposure to opioids can have long-term negative effects on pain,” says Prof Grace. “We found the treatment was contributing to the problem.”
 
Another ‘ugly side’ to opioids is this. Professor Linda Watkins, a co-author from the University of California in Boulder opines: “The implications for people taking opioids like morphine, oxycodone and methadone are great; since we show the short-term decision to take such opioids can have devastating consequences of making pain worse and longer lasting. This is a very ugly side to opioids that had not been recognized before.”
 
While on the topic, it is interesting to show that a large and detailed study of the role of opioids in pain relief was shown to be just a placebo effect in an earlier study done in four Universities, viz.,  Oxford, Cambridge, Hamburg and Munich led by Professor Bingel of Oxford in the journal Science Translational Medicine(2011; 3: 70)
 

Near Death Experiences

ADutch study published in The Lancet some time ago has shown that far from being a fantasy near death experiences (NDEs) need further scientific studies. While there is a particular sequence that al people who have gone through NDE describe their cultural background does cloud their thinking. David Wiebers, professor of neurology at The Mayo Clinic in his book Theory of Reality has a chapter on NDE where he summarises the present scientific data on NDEs to show that they are anything but fantasy. He showed that they are facts.
 
The terminology, NDE, conjures thoughts of out-of-body episodes and bright light. “Although such experiences may be repudiated as illusory, researchers of the world’s largest study to assess mental awareness during resuscitation say they have found evidence that near-death experiences may be real. Common reports of near-death experiences include encountering a bright light, meeting deceased loved ones, and seeing and hearing ‘real’ events from another perspective—often known as an out-of-body experience.” Sam Parnia, the lead author of this study was an honorary research fellow at the University of Southampton in the UK. Their data are published in the journal called Resuscitation.
 

Yoga and Meditation Could Preserve Cognitive Functions in the Elderly

“Just 3-months of yoga and meditation course may reduce older adults’ risk of mild cognitive impairment—considered a precursor for development of Alzheimer’s disease and other forms of dementia.” This is the conclusion of a new study published in the Journal of Alzheimer’s Disease. Yoga and meditation were found to improve verbal and visual-spatial memory for older adults. The study was led by researchers from the University of California, Los Angeles (UCLA), including senior author Dr Helen Lavretsky, of the department of psychiatry.
 

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