Nifty, Sensex coiled up for volatility: Tuesday Closing Report
If Nifty closes below 5,830, it will be an early sign of weakness. For now, the trend is up.
On a sharply lower volume of just 44.67 crore shares on the National Stock Exchange (NSE), which is 40% lower than normal volumes, the Nifty made a marginal gain of 10 points on Tuesday. The indices are moving sideways in anticipation of the monetary policy of Federal Reserve of the US and the policy announcement of the Reserve Bank of India (RBI) on the 20th September.
The NSE Nifty moved in a narrow range throughout the session. It opened in the negative at 5,824 and moved in the range of 5,805 and 5,858 and closed at 5,850 (up 10 points or 0.17%). 
The BSE 30-share Sensex opened lower at 19,722 and after a volatile session of moving on both the sides of yesterday’s closing, closed in the positive for the second session. The Sensex moved in the range of 19,635 and 19,819 and closed at 19,804 (up 62 points or 0.31%).
In fact, the Nifty has been trapped in a narrow range for six days now. This will change soon with a strong move, either up or down. 
The top five gainers among the other indices on the NSE were IT (1.71%); MNC (1.03%); Metal (0.85%); FMCG (0.67%) and Auto (0.65%). The only five losers were PSU Bank (1.39%); Finance (0.89%); Bank Nifty (0.86%); PSE (0.77%) and Energy (0.75%). 
Of the 50 stocks on the Nifty, 29 ended in the green. The top gainers were HCL Technologies (4.20%); Dr Reddy (3.37%); Ranbaxy (3.28%); UltraTech Cement (2.93%) and Jindal Steel (2.42%). The top five losers were Sun Pharma (3.71%); Bank of Baroda (3.66%); Axis Bank (3.20%); IndusInd Bank (3.00%) and ONGC (2.61%).
Ahead of his first monetary review, RBI governor Raghuram Rajan is slated to meet Finance Minister P Chidambaram. Today the rupee was trading at 63.10 per US dollar lower from the previous close of 62.8475 per dollar.
India's gross borrowing of Rs6.29 trillion for the current fiscal year will include Rs500 billion of debt switch as per the budgeted plan, three sources familiar with the matter told Reuters. India plans to lengthen the maturity of its rupee debt portfolio by replacing some shorter tenor debt with longer-dated paper.
According to a rating agency, with wholesale price based inching up in July, the RBI may have to up its March-end inflation forecast, which was estimated at 5% during the annual review of monetary policy in May.
Both Dow Jones and S&P 500 closed in the positive while the Nasdaq Composite ended in the negative on Monday.
Asian indices had a mixed performance. KLSE Composite was the top gainer, up 0.23% while the Shanghai Composite was the top loser, down 2.05%.
European indices were trading in the red. US Futures were flat.


A rise in real rates in India will be inevitable, says Morgan Stanley

The RBI has been managing interest rates at levels lower than warranted all through this cycle (since recovery began in 2009). This can’t go on, says Morgan Stanley

A rise in real rates in India will be inevitable considering the outlook for US real rates and the US dollar. The key to risk asset performance will be the government’s policy reforms to reverse distortions in the price of land, labour, and capital, improving the productivity dynamic and helping GDP growth to accelerate by supporting a rise in the ratio of investment to GDP. This will be critical to bring back the virtuous circle wherein real GDP growth is much higher than real interest rates. This is the observation of Morgan Stanley analysts in their research note on rising interest rates and its effect on GDP growth.


Morgan Stanley argues that the RBI has been managing interest rates at levels lower than warranted all through this cycle (since recovery began in 2009). A central bank’s dharma is to provide the appropriate counterbalancing force in the overall economy to achieve optimal growth and inflation outcomes for maximization of economic welfare.


On the recent decision of the RBI to increase interest rates, Morgan Stanley feels that it is the correct thing for the economy. Though private investment did not respond to low real rates, the RBI's accommodative monetary policy gave the government continued support to run a high fiscal deficit – one of the key factors behind high inflation. While high government deficits meant a decline in public saving, negative real rates for savers caused a further decline in household saving. As savings declined faster than investment, the current account deficit kept widening. In the context of the government's inability to quickly augment public saving by aggressive pro-cyclical fiscal tightening, hiking real rates was the only credible way to demonstrate a commitment to reduce the saving-investment gap.


The Morgan Stanley research note in its conclusion says that even as we expect saving to rise and investment to slow over the next 12 months, the current account will still be in deficit (i.e., India will still be short of saving). Hence, trends in US real rates/the US Dollar will remain the key driver of domestic real rates. “We thus believe the key will be to lift real GDP growth with policy reforms and change in expectation of the returns on investment for entrepreneurs by systematically addressing the issues related to the business environment,” says Morgan Stanley.


On the other issue of inflation, the government must take policy decisions to improve on all the factors driving inflation upwards, which include: (a) aggressive government spending (largely revenue in nature); (b) a large, sustained increase in rural wages (largely reflecting the externality of the national rural employment scheme) and (c) higher global commodity prices, particularly oil, at a time when India's mining sector output was constrained (d) negative real rates for savers.



Santosh Kanekar

3 years ago

This article ignores the fact from 2008 Indians have been steadily investing in Real estate and that is why private savings has reduced as much money is locked into real estate

Indian banks’ loan growth continues to be high at 17%, says Credit Suisse

Credit Suisse analysts continue to remain cautious on the corporate lenders as both asset quality and growth will come under pressure, they say in their research note. Also, continued growth in stress segments would mean that current asset quality issues are unlikely to dissipate quickly

Even as the GDP growth in moderated to 4.4% in 1Q, Indian banks’ loan growth continues to be relatively high at 17%, according to Credit Suisse in its research note. The credit multiplier (to real GDP) for the economy therefore is now running at 4x compared to its last 10-year average of 2.9x. Factoring  in  the WPI moderation,  the macro  slowdown  is  even more  stark  with  growth  down  8  pp  from  last year’s  levels.  The  contrast  has  been  especially  striking  in  the  past  six  months,  as  the incremental loan growth as a % of GDP growth has moved up to about 100% (versus the past 5-yr average of about 61%).


The  recent  pick-up  in  loan  growth  to  17%  in  August  from  15%  in  July,  can  be  partly attributed to the tightening in money markets and corporates’ shift away from instruments such as CPs (commercial paper). However, even adjusted for the CP issuances, loan growth is relatively high at 15%.  Another  potential  explanation,  argues Credit Suisse, could  be  the  substitution  of  foreign  currency borrowings  with  rupee  debt  by  corporates,  given  the  sharp  depreciation  in  the  currency. However, ECB (external commercial borrowings) borrowings data does not corroborate this and even in the month of July, ECB issuance was relatively high at $3.7 billion.


The divergence in credit growth versus GDP growth is shown in the following chart:


According to Credit Suisse, in addition  to  the  relatively  high  growth  rates, a growing  problem is that  a  large  share  of  incremental  growth  continues  to  emanate  from  high stress segments. Most banks have  increased  their  focus on  the consumer segment and growth  here  has  picked  up  from  14.5%  to  17%  year-on-year.  However, for the overall banking system, the retail contribution is still relatively low at about 30% of incremental loans. On a YTD basis,  the  infra  segment  has  contributed  about 45%  of  incremental  loan  growth.  There has been an increase in instances of re-financing for over-leveraged companies.


Continued growth in stress segments would mean that current asset quality issues are unlikely to dissipate quickly.  Credit Suisse analysts therefore, continue to remain cautious on the corporate lenders as it is expected that both asset quality and growth will come under pressure.


The following chart clearly shows the growth observed in stress segments:


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