Stocks
Nifty, Sensex may struggle to go up – Weekly closing report
We had mentioned in last week’s closing report that Nifty, Sensex might shed some gains. The major indices of the Indian stock markets were moving sideways through the week and made small losses at the end of the week. The trends of the major indices in the course of the week’s trading are given in the table below:
 
 
On Monday, the latest official data showed India was one of the world's fastest growing economies in the March quarter, with GDP growing at a rate of 7.9%. On the other hand, making the case for a rate cut, growth in India's private sector output declined in May as manufacturing and service sectors lost momentum in conditions of softer domestic demand, while services slowed sharply to a six-month low, a business survey on performance of the services sector showed on Friday. The Nikkei Manufacturing Purchasing Managers' Index released on Thursday rose marginally to 50.7 in May from 50.5 in April.
 
The Indian rupee on Monday strengthened by 37 paise against US dollar during the morning trade. Opening at 66.91 to a US dollar, the Indian rupee reached a high of Rs66.88 per US dollar. On Friday, the rupee closed at Rs67.25. Experts were of the view that the rupee would further strengthen against the US dollar in the wake of poor US job data. 
 
The accommodating monetary policy stance of the Reserve Bank of India despite a status quo on lending rates lifted the investors' mood and boosted key equity market indices on Tuesday. The RBI on Tuesday left its key policy rates and reserve ratios unchanged, concerned over the slight rise in inflation and some domestic and global upside risks that have sprung up since April. Almost all the sectors were trading in the green. Good buying was observed in fast moving consumer goods (FMCG), metal, basic materials and realty sectors. On Tuesday, the major indices of the Indian stock markets rallied and closed with gains of upto 0.87% over Monday’s close. Bank Nifty, in particular, closed 1.57% higher than Monday’s close.
 
To deal with any market disruption from outflows of up to $20 billion by redemption of foreign currency non-resident (FCNR) deposits, the Reserve Bank of India (RBI) would provide dollar and rupee liquidity if needed, RBI Governor Raghuram Rajan said on Tuesday. "To the extent that people have borrowed to invest in FCNR deposits that leveraged portion may not be renewed. Therefore, there could be outflows of the order of $20 billion or so," Rajan said, while announcing the Reserve Bank of India's second monetary policy review of the fiscal, leaving key interest rates unchanged. "This is something we will monitor. We will supply dollars in case of extreme volatility, but no one should take this for granted. But for sure, we have plenty of dollars that we can supply if necessary," Rajan said.
 
With the Reserve Bank of India (RBI) not altering policy rates, it will be only the transmission of monetary policy that would influence India's economic development and credit profile, credit rating agency Moody's Investors Service said. In a statement Moody's said the transmission will depend on a range of factors like the effectiveness of the monetary policy framework in maintaining inflation at moderate levels could be tested this year. 
 
Key Indian equity market indices were trading in the green during the afternoon session on Wednesday. Good buying was observed in capital goods, telecom and power sectors, while selling pressure was seen in IT sector. With interest rates likely to remain at the same level until the next review, the major indices have not found the fresh impetus to turn the stock market bullish. A good monsoon and rising rural purchasing power may be the only favourable factor for the next few months.
 
Assuring continuity in reforms and predictable tax policies, but with a firm hand against evasion, Prime Minister Narendra Modi invited USA Inc to invest in his country to forge a win-win partnership between American innovation and Indian human resource. Speaking at a gala hosted by the US-India Business Council in USA, he also called upon rich nations to open up their economies to goods and services from emerging countries like India as they seek to make world-class merchandise not just for themselves but also for the entire globe. "India is the future human resource powerhouse of the world with a young hard-working population. In my vision, a partnership between American capital and innovation, and Indian human resource and entrepreneurship can be very powerful," Modi said. "I am convinced we can strengthen both our economies through such a partnership," said the prime minister to a packed audience that included the top brass of companies like PepsiCo, Master Card, Warburg Pincus, Lockheeed Martin, Boeing, Westinghouse, Intelsat, Emerson and 8Minute Energy.
 
Key Indian equity market indices were trading in the red during the afternoon session on Thursday, as technology related stocks plunged, following a negative guidance by Infosys. Good buying was observed in metal and oil and gas sectors. Selling pressure was seen in IT and technology, media and entertainment (TECK). Cues from Asian markets were in the negative and the major indices of the Indian stock markets also fell accordingly. 
 
The US dollar dropped against most major currencies as investors lowered expectations for an interest-rate hike as early as June. In late New York trading on Wednesday, the euro rose to $1.1400 from $1.1365 of the previous session, and the British pound decreased to $1.4508 from $1.4564. The Australian dollar went up to $0.7472 from $0.7455. The dollar bought 106.86 Japanese yen, lower than 107.29 yen of the previous session. The dollar fell to 0.9587 Swiss francs from 0.9650 Swiss francs, and it inched down to 1.2711 Canadian dollars from 1.2767 Canadian dollars. Federal Reserve Chair Janet Yellen said on Monday that further US interest rate-hikes are likely on the way, but did not mention the timing of the hikes. She did not give a time-frame for raising interest rates like she did in May, which was interpreted by many market observers as "dovish".
 
On Thursday, the Indian rupee did not benefit from the troubles of the US dollar vis-à-vis other currencies. The US dollar was at Rs66.7755, up 0.45% in the afternoon on Thursday. Exporting companies in India are likely to come under revenue pressure. Overall, interest rates and currency markets are likely to have a bearing on FII (foreign institutional investors) investments in Indian stock markets rather than just corporate performance.
 
On Friday, the major indices of the Indian stock markets fell by about 0.50% or less. The markets were bearish, but buying resistance was there, as it was the last day of trading this week. Good buying was observed in power sector, while selling pressure was seen in auto and consumer durables sectors. NSE turnover was as high as 108.22 crore on Friday, and the trends of the indices were truly indicative. Overall, the share prices are still high, but the bulls are unable to force their way higher. There may be more clarity in next week’s trading when the volumes are high.

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DBS report points to economic headwinds
Development Bank of Singapore Ltd (DBS) has forecasted 7.8% GDP growth for India in FY15-16, pointing out that the recovery would be gradual and uneven. A pick-up in auto sales and consumer goods production is a good indicator of the improvement of urban spending, it says. The upcoming pay commission hikes and a normal monsoon will lift consumption both in urban and rural areas. 
 
However, the report raised the concern that there is a clear disconnect between industrial production and manufacturing GDP. If we ignore base effect differences, industrial production rose by merely 2.2%, while manufacturing GDP jumped by 9.3%
 
Indian rupee has remained the worst performing currency in Asia in 2016. The report further forecasts rupee depreciation in the next few quarters and greater volatility in Q3CY2016. Non-resident deposits maturing in September-November 2016 is as event risk. The potential outflows on account of the maturity of these deposits could lead to a number of consequences. Firstly, there may be a short-term impact on domestic liquidity and a squeeze on the balance of payments position. It could also hurt banks' deposits growth. It estimates that USD/INR is estimated to trade between 66.5 and 72.3 for the rest of 2016. It estimates a rupee to dollar conversion rate of 69.6 in Q3CY15-16 and a rate below 70 in the next three quarters.
 
On the fixed income front, the report estimates that the 2-year and 10-year bond yields will reach 7% and 7.6% respectively by mid-2017. There is a small window for policy easing in Q3FY15-16 as disinflation has passed. It estimates that net exports will remain flat/ slightly negative. With respect to corporate earnings, there were early indications of a turnaround. However, a rise in input prices in the future may adversely affect margins. 
 
On a global scale, the report raises concerns about the decline in working age population in many countries. For instance, the working age population is falling by 1% every year in Japan. In Europe too, the working age population growth has fallen to zero/slightly below zero. In the US too, the working age population growth has slowed down to 0.4% currently from 1.3% in 2000. Labour force growth and productivity growth are components of GDP growth. The report states that due to the low labour force growth, the potential GDP growth rate in these countries is low. The potential GDP growth rates in Japan, Europe and US comes at merely 0.5% p.a, 1.5% pa. and 1.9% p.a., if we were to assume 1.5% productivity growth. The actual GDP growth rates in these countries exceed the potential GDP growth rates. Given this harsh reality in these countries, the report grimly states, “In short if you are worried about slow growth today, get used to it.” It states that rather than worrying about global growth being too slow, market participants and central bankers must consider the possibility that it is running pretty fast. 
 
With respect to Asia, the report mentions, “Asia's growth today amounts to US $ 1 trillion each year. This is equivalent to adding the GDP of an entire Germany to the world's economic map once in every 3.2 years. Even after estimates of slower growth, 10 years down the lane, Asia will add one Germany every 2.2 years. Asians should not worry about Brexit as Asia would replace UK and add 3 more on top of that, in the next 8 years.

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FCNR deposits maturity could make foreign exchange markets uneasy
Around $ 25 - $ 27 billion of foreign currency non-resident (FCNR (B)) deposits are expected to mature from September to November. There is a fear among many market participants that the rupee may become volatile by 2016-end due to the maturity of these deposits, especially if exports continue to decline. According to an SBI report, “Declining  export  performance could  be  already  adversely  affecting  the  exporters’  ability  to handle  the  currency  woes  and  hence  there  is  the  possibility  of forward  contracts  getting  rolled  over.” 
 
There is a possibility of poor export performance as the global macro-economic environment is weak. India's merchandise exports have been on a declining trend since December 2014. Goods exports from India have declined by around 6.7% to $20.56 billion in April 2016 as compared to the year ago period. The SBI report further states, “It  is  expected  that  the  expiry  of  these  FCNR  (B)  deposits  will  lead  to  outflow  of  dollar  liquidity  from  the  Indian markets  if  dollar  counter parties  (exporters)  renege  on  their  commitment.” In such a scenario, the RBI may intervene in the market to provide dollar liquidity from its reserves. This may lead to a liquidity squeeze in the rupee money market. Despite the fact that the RBI has hedged its swap positions, there may be maturity mismatch in these positions.  This may lead to disruptions in Indian forex and money markets. 
 
There are many ways to deal with this situation, says SBI. The first option is that the Reserve Bank of India (RBI) will accumulate dollar reserves up to September-November 2016 period. During the period of the maturity of these deposits, it could provide dollars to the market and allow the reserves to dip. The second option is that the Government may issue a Sovereign Dollar Bond to make up for the dollar shortage. It may do so directly or through institutions like India Infrastructure Finance Company Ltd (IIFCL) or Indian Railway Finance Corporation Ltd (IRFC). The third option is to provide relaxation in Cash Reserve Ratio (CRR) during the period of maturity of deposits. For instance, SBI estimates that a 1% reduction in CRR would infuse around Rs1,00,000 crore into the system. Another option is to relax Liquidity coverage ratio (LCR) restrictions during that point of time.  RBI may use combination of such measures to counter the problem. 
 
FCNR deposit is a kind of fixed deposit made by non-resident Indians with banks. At present, it is estimated that FCNR deposits account for around 1.7% of the deposits in the banking system. Earlier, in September 2013, during a currency crisis, the RBI had opened a window to banks to swap the fresh FCNR dollar funds in order to protect the falling rupee and build foreign exchange reserves. During the period when the window was open, banks mobilized a huge $34.3 billion and swapped them with the RBI. 
 

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COMMENTS

Hemant Chitale

8 months ago

The problem is that those FCNR deposits were at much higher interest rates than what would be offered for renewals or new bonds -- unless the RBI were willing to take the risk of higher interest rates again !

REPLY

MG Warrier

In Reply to Hemant Chitale 8 months ago

Yes. Interest rates have gone down globally. No denying that the deposits were received at a rate 'above normal'. Now, India has option to repay the deposits when they mature and accept fresh deposits @ present market rates. It was in this context I referred to swelling forex reserves. The worries are overdone by vested interests (including bankers!)

Tikam Patni

8 months ago

With exports falling, corporate capacity utilisation remaining poor, banks facing crisis in stressed assets, and govt remaining engaged in vote politics. ..we are up for very bad days ahead. ..

MG Warrier

9 months ago

Dr Subramanian Swamy reportedly called these deposits due to mature in another six months or so ‘a time bomb’. Perhaps, now on, analysts, economists and media may spend precious time and energy suggesting ways and means to handle the situation. It is their job. Unlike many outside think, banks keep an account of their receipts and payments and there is an ongoing review for Asset-Liability-Management. No deposit matures without the prior knowledge of the individual/institution which has accepted it. RBI Governor has already mentioned that there is no reason for worry about the availability of resources, even if these forex funds flow out of the country, which may not happen. Our Forex reserves position has improved by about $100 billion during the last 3 years or so.

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