Stocks
Nifty, Sensex may try to rally – Weekly closing report
A dip in Nifty to 8,500 may attract buyers
 
We had mentioned in last week’s closing report that the Nifty, Sensex rally may pause and that Nifty’s medium term uptrend may continue as long as it manages to stay above 8,355. The Indian stock markets have been range-bound and the major indices have dipped a little, compared to last week’s closing values. On Friday, the movements of the major indices were as follows:
 
 
Over the week, on Monday, the stock market indices closed marginally in the red on the back of worries surrounding the monsoon progress, a likely troubled parliament session, and the upcoming monetary policy review.
 
On Tuesday, lower-than-expected first-quarter results and the logjam on the first day of Parliament's monsoon session dampened the sentiments in the Indian equity markets. Major results like Infosys, HDFC Bank, Sun Pharma and Hindustan Unilever released on Tuesday had the biggest impact on stock- or sector-specific indices. Investors were also anxious about the ability of the government to pass key bills like Goods and Services Tax (GST) and land bill during the monsoon session.
 
On Wednesday, investor's sentiments were buoyed after positive statements were made by the government, indicating political willingness to resolve the impasse on crucial legislations like the Goods and Services Tax (GST) and the land bill. The major indices improved by more than 1% on just the positive indications from the government.
 
On Thursday, political uncertainty continued. The logjam in parliament and anxiety surrounding a rate hike in the US subdued the Indian equity markets. Key economic data revealed a recovery in the US economy just before the FOMC (Federal Open Market Committee) meet on July 29, which will give further clues as to when the rate hike might take place there. With higher interest rates in the US, the FPIs (Foreign Portfolio Investors) are expected to be led away from emerging markets such as India. On Friday, there were no negative macroeconomic cues, but the Parliament logjam on ethics in politics is continuing to cast a shadow over the market. India Vix closed at 15.46, down 0.40%. NSE turnover was at 81.03 crore.
 
Out of the 27 main sectors tracked by Moneylife, top five and the bottom five sectors for this week were:
 

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Proposed new India Financial Code, likely to whittle RBI’s role in monetary policy
The Union government has proposed to strip the Reserve Bank Governor’s veto vote on India’s monetary policy
 
The government has released a draft version of the Indian Financial Code (IFC), which details various aspects of financial sector legislation including the monetary policy committee (MPC), public debt management, new regulatory architecture, among others. The key proposals on monetary policy are as follows:
 
(a) Composition of the MPC: As per the draft IFC, the MPC will comprise seven voting members, of whom three will be from the RBI (Reserve Bank of India Chairperson, RBI executive member, RBI employee) and four external members, who will be appointed by the central government for a term of four years. In addition, the government will also nominate a non-voting representative to attend all MPC meetings. This is in contrast to the Urjit Patel Committee (UPC), which had recommended a five-member MPC comprising three RBI members (majority) and two external members, who would be decided by the RBI Governor and Deputy Governor. Therefore, the draft IFC suggests that government-appointed members will be in the majority, a significant dilution of the RBI’s powers. It is to be noted that, in most countries, the government does not have representation in the MPC (except in Colombia, Guatemala and the Philippines). Among inflation-targeting countries, about half have no external members in their MPCs.
 
(b) Inflation Target: CPI inflation would be the inflation target. However, the draft IFC does not give a precise numerical target and instead states that the target CPI (and the inflation band) would be decided by the RBI and government every three years. The UPC had recommended a target of 6% by January 2016 and thereafter of 4% (+/- 2%). In line with this, the RBI and government had signed a monetary policy framework agreement in February 2015 (India: New Monetary policy framework formalised, March 2, 2015).
 
(c) Voting: Policy rates will be determined by a majority vote with one vote per member. In the event of a tie (when one person is absent; quorum is five), the RBI chair will have a second and casting vote. 
 
(d) Accountability: In the event of failure, the RBI will have to report to the central government explaining the reasons for inflation over/undershooting its target, the remedial actions and the time horizon within which the inflation target will be achieved. 
 
(e) Transparency: Similar to the UPC recommendations, the draft says that once every six months, the RBI will have to publish a report with its inflation forecast for the following 6-18 months. Additionally, the minutes of the MPC meetings will be published on the 14th day after the MPC meeting and a detailed transcript will be made available three years after the meeting. 
 
According to media reports, the Union government has proposed to strip the Reserve Bank Governor’s veto vote on India’s monetary policy. The government also proposed to grant itself the power to appoint four of the six members of the Monetary Policy Committee, whose remit will include decisions on setting interest rates to maintain inflation at the targeted level.
 
The revised draft of the Indian Financial Code, put out by the Union Finance Ministry for comments, proposes that the Reserve Bank “Chairperson” shall head the committee, with no reference to the Governor. It is not clear from the draft if a re-designation is planned. Under the revised draft, the non-government members of the committee are to be drawn from the Reserve Bank.
 
Nomura Securities, in its research note, has forecast the following implications of the change in government policy: At the outset, the draft IFC appears to have diluted the monetary policy framework that the Urjit Patel committee had recommended. While a lot will depend on the choice of MPC members, a clear majority for central government appointed members on the MPC is clearly a dilution of the RBI’s independence in executing monetary policy. Historically, governments tend to have a growth bias and hence, if implemented, this could lead to a more dovish outcome, even more so as the government will not be accountable in the event of failure to meet the inflation objective. For the RBI to be accountable without having a majority in the MPC could eventually compromise the efficacy and credibility of the central bank, and hence Nomura does not view this as a medium-term positive. This is a draft version and the government has invited public comments by 8 August 2015. Given that the monsoon session would be wrapping up by then, it is more likely that the final IFC will be taken up for discussion in the winter session of Parliament.

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COMMENTS

MG Warrier

2 years ago

Coming soon after RBI had accepted the challenge to chase an inflation target, the move based on an FSLRC report, which contained half-baked and ‘cut & paste’ recommendations, is unfortunate. One still hopes, wiser counsel will prevail and the RBI Governor who is expected to evolve and implement monetary policy will not be 'disarmed'. Whether one calls it VETO or the right of the leader guiding his team, Governor, RBI should have the final say on how RBI conducts monetary policy.
That the whole move is in bad taste is confirmed by the proposal to re-designate Governor as Chairperson. The silver-lining is that as of now we have Dr Raghuram Rajan as Governor whose eminence will not be reduced by change of designation. RBI will withstand the pressures under his leadership.
In their hurry to show ‘results’, it seems the NDA government is rebottling UPA II’s wrong policies. In financial sector, such thoughtless measures may breed chaos.
M G Warrier, Mumbai

Power ministry: Series of false claims, marginal improvements
“Highest-ever” addition of power-generation capacity (22,566 MW) in a single year; power generation touching the trillion-unit mark; lowest-ever (3.6 percent) power deficit; and a 32-million-tonne increase in coal production.
 
These are some of the claims made by the ministry of coal and power in its performance report card. However, Factchecker trawled the data and found selective and exaggerated reporting.
 
1. “Highest-ever” growth in power-generation capacity: If you juggle the data
 
Claim: 22,566 megawatts (MW) in power-generation capacity, the “highest-ever growth in a single year”, according to the power ministry.
 
Reality: Comparable capacities were added during 2011-12 (20,502 MW) and 2012-13 (20,623 MW). If you consider the highest-ever growth in “power capacities added” between consecutive years, it actually happened between 2010-11 and 2011-12, when 8,341 MW capacity was added.
 
2. First time in Indian history, a trillion units: 3.4 percent growth over previous year
 
Claim: One trillion units of electricity were generated last year; first time in history.
 
Reality: From 772 billion units of electricity generated during 2009-10 to 967 billion units during 2013-14, power generation rose by about 200 billion units in five years, a growth of 25.4 percent.
 
So, it required only an additional 33 billion units, or 3.4 percent, to touch the trillion-unit mark.
 
3. Lowest-ever power deficit: 0.6 percent reduction from previous year
 
Claim: Deficit reduced to 3.6 percent, “the lowest ever”.
 
Reality: The deficit declined from around 10 percent during 2006-10 to 4.2 percent in 2013-14. The power deficit of 4.2 percent in 2013-14 was the lowest until then. So, the power deficit declining to 3.6 percent during 2014-15 was a reduction of 0.6 percent compared to the preceding year.
 
4. “Significant increase” in wind-energy capacity: Higher increases in 2010-11 and 2011-12
 
Claim: Wind-energy capacity installed during 2014-15 was 2,312 MW, compared to 2,083 MW during 2013-14, a “significant increase”.
 
Reality: Higher capacities were installed during consecutive years, 2010-11 (2,349 MW) and 2011-12 (3,196 MW).
 
5. “Significant increase” in small hydro projects (SHP): 101 MW in 2011-12
 
Claim: Capacity installed during 2014-15 was 251 MW compared to 171 MW during 2013-14 - a “significant increase”.
 
Reality: SHP capacities added during 2011-12 and 2012-13 were 352 MW and 237 MW, respectively
 
6. Four-year record in coal production: Not according to data given to parliament by a minister.
 
Claim: Increase of 32 million tonnes in 2014-15; output at 494 MT in 2014-15, compared to 462 MT in 2013-14; “increase higher than increase in previous four years”.
 
Reality: The production figure of 462 MT during 2013-14 does not match data tabled by the coal minister in Parliament on July 17, 2014. That data puts coal production during 2013-14 at 566 MT and not 462 MT.
 
More significantly, coal production of 494 MT in 2014-15 is less than the coal production during each of the previous five years (2009-10 to 2013-14).

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COMMENTS

NANDAKUMAR M S

2 years ago

Super! You are saying coal production has actually decreased on the basis of claim by the data by previous Govt. What is the basis of accepting one data over other? And even routine statements seem to have been taken out of context (as great claims) and you trash it. Anyway within a year no Govt. could have done a lot -it requires at least 3 years to even compare. And why are you not comparing the immediate years which would give trend? Expect more intellectual reporting from moneylife!

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