The indices may struggle for a day before a correction starts
Today the domestic indices opened cautiously ahead of the mid-quarter policy review. The market was moving flat until the Reserve Bank of India (RBI) came in with its surprise decision of raising its key policy rate when the indices crashed and hit its days low in the pre-noon session. The market recovered a lot of ground but ended in the negative, breaking the four days of rise on the Sensex and three days of up move on the Nifty.
The Sensex and Nifty opened lower at 20,616 and 6,105. The indices hit a high of 20,678 and 6,131. Post the rate cut by RBI, the indices crashed to the day’s low of 20,051 and 5,933. the Sensex closed at 20,264 (down 383 points or 1.85%) while the Nifty closed at 6,012 (down 103 points or 1.69%). The National Stock Exchange recorded a volume of 92.75 crore shares, among the highest ever.
The RBI has raised its key policy rate viz. the repo rate by 25 basis points to 7.5% from 7.25%. The Reserve Bank of India in its mid-term policy review stated that inflation will be higher than the initial forecast. "What is equally worrisome is that inflation at the retail level, measured by the Consumer Price Index, has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence", said RBI. However, the good monsoon may ease some pressure on the retail inflation, the central bank added. The RBI kept the cash reserve ratio (CRR) unchanged at 4%.
The RBI has also simultaneously decided to start unwinding the exceptional measures it had taken since mid-July to tighten liquidity with a view to dampening volatility in the foreign exchange market. As a first step, it has decided to reduce the marginal standing facility (MSF) rate by 75 basis points with immediate effect. Furthermore, the minimum daily maintenance of the CRR prescribed by the Reserve Bank of India (RBI) has been brought down from 99% of the requirement to 95% from the fortnight beginning 21 September 2013. The timing and direction of further actions on exceptional measures will be contingent upon exchange market stability, and can be two-way, the RBI said. Further actions need not be announced only on policy dates, the RBI said. However, any further change in the minimum daily maintenance of the CRR is not contemplated, the RBI said.
India's gold imports will resume after a two-month gap as the government and banks today sorted out how new rules on overseas purchases should work, a trade ministry source told. At least 20% of the gold imports must be turned around for exports as per a July 22nd rule.
Fitch Ratings cut India's growth forecast for the current financial year to 4.8%, saying weak demand is a large drag on the economy. The sharp cut in the growth forecast comes when the country faces challenges such as slowing growth, exchange-rate woes and concerns about the current account deficit. Fitch also cut India's growth rate projection for FY15 to 5.8% from the June forecast of 6.5%. In September 2012, the ratings agency had projected a growth of 7.5% for FY15.
US indices had mixed outcome. Nasdaq Composite closed in the positive while the Dow Jones and S & P 500 closed in the negative.
Billionaire investor Warren Buffett said that politicians not lifting the U.S. debt ceiling would be "pretty damn dumb". "The market is not going to fall apart," Buffett said in an interview aired on CNBC on Friday, because markets will only expect politicians to act irrationally for a certain length of time. Still, he called the possibility of such a debt standoff "disturbing."
Except for Shanghai Composite (up 0.29%), Hang Seng (up 1.67%) and KLSE Composite (up 0.50%) all the other Asian indices ended in the negative. Jakarta Composite, the top loser, down 1.86%.
European indices were mostly trading in the red as were the US Futures, after.
The protest is against the Government’s proposal to merge public sector banks. They are also against the merger of Associate Banks with State Bank of India (SBI).
The All India Bank Employees Association (AIBEA) and the Bank Employees Federation of India have called for an all-India bank strike on September 25 to protest against the Government’s proposal to effect mergers among public sector banks. They are also against the merger of Associate Banks with State Bank of India (SBI).
“More and more branches have to be opened by all the banks to reach the people. But the Government’s policy is misdirected. It wants to consolidate the public sector banks while the need is to expand them,” opined the bank staff unions. Criticising the proposed handing over of licences to big industrial and business houses to launch banking operations, the unions said pre-nationalisation, all banks were in private hands and their track-record was only well known to the country.
In today’s developments Corporation Bank has informed BSE that the bank has been informed by the Indian Banks’ Association, vide their Circular letter dated August 27, 2013, that All India Bank Employees Association (AIBEA) and Bank Employees Federation of India (BEFI) have given a call for a nationwide strike on September 25, 2013 in support of some of their demands. A section of the Bank's employees may participate in the proposed strike on the said date, if the strike materialises. This is according to a BSE filing by Corporation Bank.
It is likely that the banks strike will materialise on 25th September.
India can fund the current year’s CAD without substantially drawing upon the country’s forex reserves, said Dr Raghuram Rajan, governor, Reserve Bank of India in his press meet
Dr Raghuram Rajan, governor, Reserve Bank of India declared that there was unwarranted panic in the rupee market in the recent past, when the US dollar was valued at close to Rs70. There is no need to panic today, as the oil prices are not going to shoot up in US dollar terms, while the Syrian crisis seems to be under control.
While the current account deficit (CAD) of India is a cause for concern, India can fund the current year’s CAD without substantially drawing upon the country’s forex reserves, pointed out Dr Rajan in his press meet. He felt that the inflationary pressures were mostly due to higher oil prices and rupee depreciation, and the fear of the high fiscal deficit was being tackled by the Finance Minister.
The country has breathing room to put its economy in order, as the Federal Reserve has postponed its plans to taper down the asset purchases. The emerging markets will still be flush with dollars to buy on the part of foreign institutional investors. The Reserve Bank will be ready with the economy in better shape, argued Dr Rajan, when the Fed does decide to taper down asset purchases in a phased manner.
In order to encourage market players, the Dr Rajan said that there was no intent to impose additional capital controls in the forex market. Even the OMC (oil marketing companies) forex window will not be permanent and will be tapered down once the economy improves. RBI will be happy to liberalise once the inflows resume, assured Dr Rajan.
Dr Rajan also observed that the market was still in a wait-mode as it anticipates some harsh measures from the government on fuel subsidies, especially diesel. This will be known shortly.
On the common man’s concerns, Dr Rajan said that the kharif crop harvest was expected to be good and that once the rural sentiment improved, the demand-side concerns in the economy would recede. Inflationary pressures would improve over a 6-month horizon.
Dr Rajan hastened to point out that the repo rate hike by 25 bps was not only to control inflation. “This is the course that we have to take to stabilise the economy. We must balance the state of the economy against the fight against inflation,” he insisted. The cut in marginal standing facility (MSF) to 9.5% was there to promote growth.
Dr Rajan pointed out that there were talks to ensure India has a place in the global bond market map. Also, he said that the FII (foreign institutional investors) gilt investments limits were yet to be breached. After a knee-jerk reaction to the repo rate, the stock market recovered substantially.