The market ended with splendid gains in the week ended 1st October on positive economic triggers and across-the-board buying support by institutional investors.
The market opened strong on positive global cues on 27th September, the first trading day of the week, but gradually drifted lower and settled with meagre gains. It closed flat with a negative bias on Tuesday amid choppy trading. Huge selling pressure resulted in the indices closing below their psychological levels on Wednesday. The decline was led by Sterlite Industries, which lost over 8% after the Madras High Court ordered the closure of its Tuticorin plant on environmental issues.
The market bounced back in the dying moments on Thursday helping the benchmarks regain their crucial levels. Earlier in the day, the market touched its intraday low on reports of a rise in the weekly inflation numbers. It started the new month on a roll with the key barometers touching a 33-month high in intraday trade.
On a weekly basis, the indices clocked gains of 2% with the Sensex surging 399.86 points and the Nifty added 125.10 points.
The top Sensex gainers during the week were Hindalco Industries (up 7%), Tata Steel, DLF, Jindal Steel & Power (JSP) and BHEL (up 6% each.). The top losers were Oil and Natural Gas Corporation (ONGC), Hindustan Unilever (HUL) (down 2% each), ACC, Hero Honda and Reliance Communications (RCom) (down 1% each).
All sectoral indices ended in the positive territory this week. BSE Metal and BSE Realty gained 5% each while BSE Oil & Gas and BSE Fast Moving Consumer Goods (FMGC) were on the bottom of the list, ending flat.
Meanwhile, during the month of September, the Sensex gained 1,863.25 points (10%) to end the month at 20,009. The bellwether index touched a high of 20,267 and a low of 18,027. The Nifty raked in gains of 10% or 558.10 points last month settling at 6,029 on 30th September. The index touched a high of 6,073 and a low of 5,403 during the month.
Food inflation increased to 16.44% in the week ended 18th September, climbing 0.98 percentage points from 15.46% in the previous week. The rise in food inflation was due to a rise the cost of cereals, fruits, select vegetables and milk on account of supply disruptions due to heavy rains and floods.
This was the fifth consecutive week in which the rate of food prices has risen, after a spell of moderation in July and the first half of August.
The country's exports grew by 22.5% to $16.64 billion in August compared to the same period last fiscal. Imports, too, jumped by 32.2% year-on-year to $29.67 billion in August, according to the government data released this week.
During April-August this fiscal, exports posted a growth rate of 28.6% to $85.27 billion on a year-on-year basis. Imports during the same period grew by 33.1% to $141.89 billion.
Manufacturing activity in the country expanded at its slowest pace in 10 months in September, as per the Purchasing Managers' Index (PMI) data released on Friday.
The HSBC Markit PMI, based on a survey of 500 companies, slid to 55.1 in September, compared to 57.2 a month ago. This is the second month in a row that PMI has fallen. A reading above 50 indicates expansion in manufacturing activity.
The Asian Development Bank (ADB) earlier this week raised India's growth forecast for the current fiscal to 8.5% from 8.2% but expressed concern over persistent high inflation and the rising value of rupee, which could undermine future economic expansion.
The multilateral lending agency had projected a growth rate of 8.2% for 2010-11 in April. For the next financial year (2011-12), ADB has retained its earlier projection of 8.7%.
Two amendments moved by a US senator on restricted hiring of foreign workers and another aimed at preventing fraud and abuse of H-1B and L1 visas could not pass the Senate floor as they were blocked by the Democratic Party.
The two amendments moved along with the Creating American Jobs and End Offshoring Act, were blocked by the Democratic Party, senator Chuck Grassley, its author said earlier this week.
His first amendment would have prevented any company engaged in a mass lay-off of American workers from importing cheaper labour from abroad through temporary guest worker programs.
The second would have taken aim at fraud and abuse of the H-1B and L Visa programs, while making sure Americans have the first chance at high-skilled jobs in the United States.
Both amendments were being blocked by the Democratic Senate Majority Leader, the senator said in a statement.
Bullish consensus about emerging markets may cause the next bubble
In 1989, Japan was caught up in one of those bubbles that pop up regularly in different decades in different countries. Property prices in Tokyo's Ginza district were valued at over $93,000 per square foot (Rs41.85 lakh per square foot at today’s exchange rates). The Nikkei Index hit 38,957 in December 1989 sporting a PE of 78. If the Sensex were to hit that level of overvaluation, it would be at 80,000 now! The boom was fuelled by tariff protection that led to large trade surpluses that, in turn, led to easy and cheap credit from banks which pushed up all stocks and real estate. Almost 90 years ago, the world was in the grip of another mania. Surprise, surprise it involved ‘emerging markets’ like Argentina and Russia.
No two bubbles are alike but the way foreign investors have turned bullish on emerging markets, and especially on India now, it could mean that the overvaluation of the Indian markets we have been frowning at, could make us look foolish. The party has just begun for many. But since India does not have a pipeline of cheap credit, what would fuel the bubble?
A few weeks ago, the Open Market Committee of the US Federal Reserve issued its end-of-meeting statement. It said all of the usual things in its bland way about the economy but one sentence caught the attention of big investors. “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.” The Fed is saying that it wants to create inflation, when central banks are usually found fighting it. The Fed obviously believes that if rates near 0% have not been able to fight deflation, then the Fed is just going to do more of the same. It would print money to create inflation as part of quantitative easing part 2 (QE2).
This means that trillion dollars of new money could soon be injected into the US system. The question that traders are asking is that if a trillion dollars did little in the past two years, would another trillion be of any use? Doing the same thing repeatedly and expecting a different outcome is the definition of insanity but it leads to another question: If a trillion dollars cannot find much productive use in the US, where will it all go? Some of it will go into US stocks, some into commodities and a lot into emerging markets, which have now ‘proved’ beyond doubt that they are where the wealth-creation would be, in the coming decades. In short, if emerging market boom was merely a fanciful theory in the 1990s and became a plausible hypothesis in the 2000s, it is looking like a full-blown consensus in 2010. The issues that one associates with all emerging markets (corruption, poor governance, frequent policy shifts, mindless rules, a broken justice system…) are being brushed under the carpet. Watch a bubble take shape.
SEBI’s rejection of MCX-SX’s application to start equity trading, not only stifles much-needed fresh thinking, competition and innovation, but draws attention to SEBI’s own sordid ethical standards
That the Securities and Exchange Board of India (SEBI) rejected MCX Stock Exchange's (MCX-SX) application to launch the equity segment was no surprise. Nor is the MCX-SX's decision to fight back. The regulation of demutualised bourses remains a contentious issue, despite being referred to several committees. But it is obvious that the narrow and illiquid Indian capital market urgently needs to get rid of a score of defunct, parasitic, regional bourses and permit fresh thinking, competition and innovation which MCX-SX can inject. Whether this happens or not will be decided by the courts, but there are some intriguing angles to the entire controversy.
For starters, does India, whose economic growth is attracting so much foreign attention, support entrepreneurship, or do we secretly revel in discrediting our own success stories? Will we ever support open competition or cripple businesses on the whims of self-serving netas and babus?
On 31st August, MCX launched the Singapore Mercantile Exchange (SMX). It should have been a proud moment, but the domestic war with SEBI cast a dark shadow. On 23rd September, SEBI rejected MCX-SX's application to launch equity trading saying it was 'not fit and proper' and 'dishonest' to boot. Isn't it ironical that India, which ranks a low 84th on Transparency International's corruption perception index, took the high moral ground, to discredit a management that Singapore, which ranks No 3 in terms of transparency, found fit enough to launch its first international, pan-Asian derivatives exchange? Singapore is not alone. MCX runs the multi-asset, multi-access Bahrain Financial Exchange. It is in the process of setting up multi-asset exchanges in Mauritius and Botswana (called Bourse Africa). It also successfully launched, and handed over, the Dubai Gold and Commodity Exchange.
There are domestic successes as well. The flagship Multi Commodity Exchange (MCX) is by far the market leader in commodity derivatives; MCX-SX was a leader in currency derivatives (jointly regulated by SEBI); it runs the National Spot Exchange Ltd which trades agricultural commodities; the Indian Energy Exchange which trades electricity and IBS Forex, is its inter-bank forex exchange platform. No other exchange group has achieved so much so fast in a competitive environment. And there are no reports of other regulators having problems with MCX either.
None of this mattered to the SEBI's whole-time member, while rejecting the case of MCX-SX with 68 pages of hair-splitting.
He found that MCX and Financial Technologies were 'acting in concert'. He discovered that the warrants issued to promoters (for the value they sacrificed by shrinking promoters' capital to meet SEBI's norms) had economic value even though such warrants earned no dividends, have no voting rights and cannot be converted into shares unless SEBI rules change. It is almost as if SEBI knows that its ridiculously low 5% cap on individual shareholding will have to be increased to the 15% or 26% that is permitted in the commodity and currency derivatives markets. Were that to happen, MCX's promoters would legitimately want to convert warrants and enhance their holding. SEBI wants to kill any such possibility.
Interestingly, the National Stock Exchange (NSE), an opaque and secretive, virtual monopoly basked in high valuations that were possible because the regulator gave it plenty of time for equity dilution without imposing the restriction it did on MCX-SX. But MCX-SX was systematically cornered.
First, SEBI allowed NSE to subsidise currency derivatives through the high fees charged in the equity segment. MCX-SX suffered huge losses, while the Bombay Stock Exchange (BSE) simply shut its currency derivatives segment within two months. The newly launched USE (United Stock Exchange) is also boasting market leadership without a revenue model. Neither the Reserve Bank of India (RBI) nor SEBI bothered to explain how they permitted a fourth currency derivatives exchange whose high trading volumes translate into direct losses since, like the NSE, it does not collect transaction charges. What happens when its net worth slips below Rs150 crore? USE must be hoping the Competition Commission will rescue it by ruling in favour of MCX-SX on NSE's predatory pricing.
When the loss-making MCX-SX was denied permission to launch new segments, it couldn't possibly find new investors and was forced to reduce capital to meet SEBI norms. Stunningly, the idea allegedly came from JN Gupta, SEBI's executive director in charge of secondary markets, who used to be a commodity trader in Kazakhstan before returning to SEBI. The SEBI order simply ignores Mr Gupta's role in 'misleading' MCX-SX into opting for capital reduction.
If SEBI had higher regulatory standards than Bahrain, Singapore and Dubai, its action against MCX-SX would have somehow seemed plausible. SEBI's actions appear malicious when we see how the same regulator buried the cases against the National Securities Depository Ltd (NSDL) in the IPO (initial public offering) scam of 2006, in order to absolve chairman CB Bhave of taint or even constructive liability in that scam (he was chairman of NSDL then). The SEBI board went so far as to discredit a two-member committee of its own board directors and declared their orders 'void'. In the process, it also ignored a legal opinion by Justice JS Verma, one of India's most respected Chief Justices of the Supreme Court.
In throwing the rulebook at MCX-SX, SEBI is essentially saying, "show me the person and I will show you the rule."
Why would SEBI be so determined to finish off MCX-SX? MCX has openly accused it of favouring NSE whose high valuation is at a serious risk (not to mention the stunning salaries of its top three executives) when up against a serious competitor. Remember, MCX has beaten NSE in every segment where they have been in direct competition: commodities, currency and energy.
Then there are the personal relationships. When CB Bhave was desperate to leave SEBI in the early 1990s, under chairman DR Mehta, NSE gave him a berth at NSDL. Mr Bhave was thus in the happy position of writing the statute that ensured that the depository was not entirely under SEBI regulation; he used it to his advantage to expand into other areas without seeking SEBI approval.
It may be clever to ensure that rules and ethical standards are flexible enough to be twisted at convenience. But sadly, it makes for very dubious regulation.