Stocks
Nifty, Sensex may put in a rally – Tuesday closing report
We had mentioned in Monday’s closing report that Nifty, Sensex were still directionless. The major indices of the Indian stock markets recovered to close in the green on Tuesday. The gains of the major indices at Tuesday’s close of trading were less than 0.50%. The trends of the major indices in the course of Tuesday’s trading are given in the table below:
 
 
A sharp rise in US futures markets, a rise in European indices, and a rebounding rupee led key Indian equity indices to trade in the green on Tuesday, while recovering considerably from last week's Brexit hangover. Healthy buying was particularly witnessed in stocks of fast moving consumer goods (FMCG) and healthcare. The BSE market breadth was tilted in favour of the bulls -- with 1,596 advances and 999 declines.
 
The United Kingdom is likely to explore direct bilateral trade agreements with India post the vote to exit from the European Union, thereby giving a boost to slowing UK-India trade, Development Bank of Singapore (DBS) said on Tuesday. "Post exit EU, the UK is likely to explore direct bilateral trade agreements with other trading partners, including India," DBS said in a research note.
 
"This might provide an alternate route to India, in comparison to the tough and the drawn-out negotiations on the EU Free Trade Agreement, in turn providing a fillip to a slowing India-UK trade," said DBS. Noting that the UK accounts for 15% of India's total merchandise trade, the report said this share has, however, been declining. Trade in services has also eased. The report highlighted the notable investment links between both countries. The UK is the third largest inward investor into India, after Mauritius and Singapore, with cumulative foreign direct investment (FDI) equity investments of $22.7 billion (from April 2000 to December 2015), or 8% of the total FDI inflows. In turn, India is the third largest investor, based on the number of projects, into the UK. Indian businesses that tap the UK domestic markets are unlikely to face many challenges, DBS said.
 
State-run United Bank of India on Tuesday said it will focus its lending on Micro, Small and Medium Enterprises (MSMEs) and retail and will avoid capital guzzling sectors. The bank is planning to raise up to Rs 1,000 crore ($145 million) in one or more tranches through a public issue or qualified institutional placement (QIP) or rights issue for which it sought shareholders' approval at its Annual General Meeting. "In 2016-17, the bank's focus areas for lending would be in the MSME and retail segments," Managing Director and Chief Executive Officer P. Srinivas told the shareholders. The bank will strive to achieve all its targets under Mudra Scheme, Standup India scheme and strengthen its retail channels, particularly housing, education and vehicle loan segments, he said. "While making advances, the bank will endeavour to avoid sectors which are capital guzzlers and concentrate on government guarantee schemes. The bank will also augment its resources to ensure wealth generation for the future," he said. The shares of the bank closed at Rs22.45, up 0.45% on the BSE.
 
The multiple downside risks in the proposed consolidation in the Indian public sector banking (PSB) space far outweighs the potential benefits, said global credit rating agency Moody's Investors Service. The Bank Nifty closed at 17,561.55, up 0.27%.
 
The US dollar continued to climb against most major currencies after Britain voted to leave the European Union in a historic referendum. In late New York trading on Monday, the euro fell to $1.1019 from $1.1144 of the previous session, and the British pound decreased to $1.3192 from $1.3696. The Australian dollar went down to $0.7343 from $0.7508. The dollar bought 101.99 Japanese yen, lower than 102.24 yen of the previous session.  The dollar rose to 0.9776 Swiss francs from 0.9724 Swiss francs, and it climbed to 1.3092 Canadian dollars from 1.2936 Canadian dollars. Currency movements are considered important by stock market analysts in India, as a substantial portion of the investments come from foreign institutional investors into emerging markets like India. However, international interest rates in the banking sector are expected to be stable and not contribute to volatility.
 
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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Decision on implementation of 7th Pay Commission soon?
The Union Cabinet is likely to discuss and take a final call on the recommendation to implement the seventh Central Pay Commission. This follows a report submission by the Committee of Secretaries, which has recommended a little less than 20% average hike as against an earlier media report of a hike of 30%. 
 
According to Religare Capital Markets Ltd, the implementation of the 7th CPC recommendation should boost consumption, reduce slackness in the economy and step up investment demand. Large consumer discretionary names are likely to be the top gainers in this scenario. 
 
"However," it says, "With the states and public sector units (PSUs) also set to effect similar hikes (some states like Telangana have already done it); we see a permanent fiscal stimulus of $50 billion over the next two years, with significant multiplier effect on gross domestic product (GDP)."
 
In January this year, the Indian government had set up the high-powered panel to process the recommendations of the 7th Pay Commission which will have bearing on the remuneration of nearly 50 lakh central government employees and 58 lakh pensioners.
 
A Committee, headed by Cabinet Secretary PK Sinha, has already vetted the 7th Pay Commission recommendation and its report is being translated into a note for Cabinet. The Commission had recommended 23.55% overall hike in salaries, allowances and pension involving an additional burden of Rs1.02 lakh crore or nearly 0.7% of the GDP, says a report from the Business Standard.
 
The entry level pay has been recommended to be raised to Rs18,000 per month from current Rs7,000 while the maximum pay, drawn by the Cabinet Secretary, has been fixed at Rs2.5 lakh per month from current Rs90,000. 
 
While the Budget for 2016-17 fiscal did not provide an explicit provision for implementation of the 7th Pay Commission, the once-in-a-decade pay hike for government employees has been built in as interim allocation for different ministries, the newspaper report says.
 
According to the Religare, the Budget for FY2016-17 has for only Rs70,000-Rs73,000 crore towards 7th CPC wage bill increases and one rank one pension (OROP). As per 7th CPC recommendations, the total requirement would be around Rs1.02 lakh crore for the two payouts. "If only 20% hike is finally awarded, the FY17 incremental spend on wages and salaries and OROP would still be more than Rs90,000 crore, leaving a fiscal gap of about Rs20,000 crore.
 
The other possibility is that the allowances payment is deferred to next year. Further, as per media reports, the central government employees may get their first higher salaries from July onwards, to be credited on 1st August, along with a likely arrears of six months' since the higher salary is effective from 1 Jan 2016," it added.
 

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4 indicators to watch after a new RBI governor joins
After September 2016, there would be a new Governor at the Reserve Bank of India (RBI) following the decision of incumbent Dr Raghuram Rajan to not to continue after his terms gets over. In this scenario, there are four indicators to watch for after the new Governor joins. This includes, tapping of RBI's excess funds for capitalisation of public sector banks (PSBs), operation of stressed asset funds, treatment of restructuring and asset quality review (AQR), and rate cuts, says a research note.
 
In the report, Religare Capital Markets Ltd says, there are certain ramifications of changes in these four key regulatory areas if the new Governor diverges from Dr Rajan's stance. 
 
Here is the analysis from Religare about the four key regulatory areas and its impact...
 
1. Tapping RBI’s excess funds for PSU bank capitalisation
The Economic Survey 2015-16 (pages 19 & 20) highlighted that the RBI’s capital adequacy ratio at 32% is much higher than the median 16% ratio of all other central banks. The government has stated that even if the RBI brings down capital adequacy to 16%, it will free up Rs3-4 lakh crore for capital infusion into PSU banks and/ or the creation of a bad bank to resolve bad loans. 
 
"The government has budgeted only Rs70,000 crore for capital infusion over four years. Considering the huge gap between the capital required and that budgeted, the new governor may agree to use the RBI’s capital for banks. In our view, this creates a clear moral hazard, but proponents of such a move see nothing wrong with the government tapping its own funds for a one-time capital injection under Basel III," Religare says.
 
2. Operation of stressed asset funds
The RBI, Indian Banks’ Association (IBA) and banks are in the last stage of finalising norms for the operation of stress asset funds in India. As per media reports, the central bank is against allowing banks to own a majority stake in distressed funds. Also, the RBI believes banks should not contribute meaningfully to stressed funds in the form of debt, as this will do nothing to alter their risk. Additionally, such contributions could involve opaque asset pricing. However, banks are aggressively pushing to be allowed to contribute and/or own stakes in stressed funds. 
 
Religare says, "If permitted by the new governor, this will be negative for the sector as it will mask the true value of write-offs or haircuts required on such assets and prolong the uncertainty over NPAs."
 
3. Treatment of restructuring and AQR norms
Banks are pitching hard to the RBI for further relaxation of the recently announced restructuring norms and the upgrade of certain borderline cases that were classified as NPA under the RBI’s AQR. 
 
"Though we agree with certain procedural relaxations or changes, any measures which merely push the problem down the road will be negative for the sector," the research report says.
 
4. Policy and lending rates
Religare feels that if the new governor cuts policy rates more aggressively than Dr Rajan, banks will have to lower lending rates. 
 
"We do not rule out further changes to marginal cost of funds based lending rate (MCLR) or base rate norms for better transmission of policy rates. If lending rates come off aggressively, banks’ margins will reduce. The correlation between lower rates and higher loan growth or NPAs is very weak," Religare concluded.

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COMMENTS

P L Despande pawar

8 months ago

It is the owners' responsibility to capitalise the Banks & not of the Regulator(RBI). As Governor Rajan has said recently, RBI capitalising Banks would lead to moral hazard.
Similarly, it will not be proper to allow Banks to involve themselves much less in a big way in ARCs.

IF NEW GOVERNOR SUCCUMBS TO PRESSURE FOR EASY OPTIONS IT WILL BE THE BEGINNING OF THE END & THE ULTIMATE SUFFERERS WILL BE THE PUBLIC AT LARGE.

B. Yerram Raju

8 months ago

Stressed assets, digital banking, customer service and banks' excessive interest in cross-selling are all the unfinished agenda of Rajan that the next Governor has to grapple with. It is not interest so much as risk management that matters.

MG Warrier

8 months ago

The fallacy in the Economic Survey 2016 observation about RBI holding 32 per cent capital has been pointed out earlier. Any reader who can reconcile the position taken in the Economic Survey 2016 (RBI is having 32 per cent capital) and the real position reported in the RBI Annual Report 2014-15 (Percentage of RBI’s capital and reserves to assets base has come down from 11.9 in 2009 to 8.4 in 2015) may kindly come out with facts and figures.
Long back, RBI had taken a conscious decision to augment its reserves (Contingency Reserves + Assets Development Reserves) to a level of 12 per cent of the Bank’s balance sheet total. The Bank almost managed to almost touch this level in 2009. The following table indicates the progressive deterioration in the reserves position, since then:
Balances in Contingency Fund (CF) and Asset Development Fund (ADF)(Crore)
June 30 CF ADF CF+ADF As%to total assets
2009 153392 14082 167474 11.9
2010 158561 14632 173192 11.3
2011 170728 15866 186594 10.3
2012 195405 18214 213619 9.7
2013 221652 20761 242413 10.1
2014 221652 20761 242413 9.2
2015 221614 21761 243375 8.4

Source: RBI Annual Reports

RBI’s capital since inception has remained at Rs 5 crore. There is no clarity about the components reckoned for computing the RBI’s capital and capital-like reserves at 32 per cent of balance sheet total. The Survey obviously has depended on the computation of figures by some external agency(the graph given in the Survey is attributed to BIS) instead of quoting from RBI’s Annual Reports.

To meet the internal capital expenditure and make investments in its subsidiaries and associate institutions, the Reserve Bank had created a separate ADR in 1997-98 with the aim of reaching one per cent of the Reserve Bank’s total assets within the overall indicative target of 12 per cent of the total assets set for CF and ADF taken together, accepted by the Bank earlier.
Obviously, the practice of transferring the entire ‘surplus income’ to government when the reserves position of the central bank shows a continuous declining trend(as a percentage of total assets) in the context of the present growth rate of Bank’s asset size, needs a review. Considering the size of RBI’s balance sheet, and remembering that the Bank’s share capital(5 crore) has not been augmented since inception, the reserves position needs to be raised to healthier levels. It is in this context and in view of the internal and external pressures on its income generating capabilities in recent times, as also the nature of shocks RBI has to absorb from time to time, GOI should support the central bank to augment its reserves at least to the level of 12 per cent of total assets which was accepted by the Bank decades ago.
The accounts presented in the RBI Annual Report 2014-15 (Chapter XI-Introductory) shows that the balance sheet size of the Reserve Bank increased by 10.09 per cent for the year ended June 30, 2015 primarily due to increase in foreign currency assets on the asset side which rose by 21.50 per cent and increase in notes in circulation and deposits which rose by 9.57 per cent and 37.60 per cent respectively on the liability side. While gross income for the year 2014-15 increased sharply by 22.66 per cent, the total expenditure increased by 11.92 per cent. The year ended with an overall surplus of `65,896 crore as against `52,679 crore in the previous year, representing an increase of 25.09 per cent. The entire surplus has been passed on to central government. This is based on a review of reserves position made by an internal panel headed by one of the Bank’s directors Mr Y H Malegam which concluded in 2014 that the level of reserves then available was adequate to meet the needs for the next three years.

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