Weekly Market Report: Nifty, Sensex on a downtrend
Nifty is on the downtrend on higher inflation, lower industrial output and tapering fears. Rallies are likely to be met with selling 
Last week, we wrote that the bulls lacked conviction to take the stock markets higher. And this is exactly what happened. The bulls couldn’t find a solid grip to take the stock markets higher, despite hitting an all-time high on Monday (you may want to check out on why Sensex all-time high was different from 2008). Barring Monday’s opening, the market has been weak throughout. Several indicators pointing towards a taper has spooked the bulls. Finally, Indian inflation figures rose and industrial production figures fell, as per data released on Thursday evening, which sent the markets down further on Friday, extended losses for four straight sessions. The RBI is likely to increase repo rates to control inflation. All this collectively doesn’t bode well for the Indian stock markets.  The BSE Sensex finished the week at 20,716, down 281 points, or 1.34%. The NSE Nifty finished at 6,168, down 92 points, or 1.46%.
On Monday, the stock markets opened strong on the news of BJP’s strong show in four key states, and saw it as a pre-cursor to the upcoming general elections. The stock markets hit an all-time high, with Sensex touching 21,483 and Nifty touching 6,415.25. However, the markets could not sustain this and would go down from here in the next few days, despite the positive news. 
Tuesday saw positive US economic data which boosted the case for tapering. Indian stock market participants booked profits amidst fears that the tapering would hit markets. This was further underscored by Fed Bank of St. Louis President James Bullard in a speech. This spooked the markets and throughout the day, the markets trended down. 
Markets closed down on Wednesday, for the second consecutive day, amidst news of Fitch and S&P warning that Indian government must do something to revive the economy or risk downgrade. Tapering fears continued to hang over the markets. Finance minister, P Chidambaram, sought to assure the markets of the government’s resolve to keep fiscal deficit to in check. 
Thursday saw continued pessimism, with the bears in control, with markets closing down for the third consecutive day. The RBI said that the liquidity conditions are expected to tighten in the immediate future on account of advance tax payments commencing from mid-December 2013. With less cash to spare, investment demand is expected to be subdued in the third quarter. 
On Friday, stock markets reacted to grim inflation figures and manufacturing data, and extend losses for the fourth consecutive day to end the week even lower. Stock market participants are now anticipating a rate hike from Reserve Bank of India (RBI) governor, Raghuram Rajan, who has kept inflation control as the centerpiece of his interest rate agenda.
Among the other indices on the NSE, the top two indices were IT (1%) and FMCG (1%) while the while the top two losers were PSE (5%) and PSU Bank (5%).
Among the Nifty stocks, the top five gainers were Sesa Sterlite (5%); Wipro (5%); H C L Technologies (5%); Infosys (1%) and Lupin (1%) , while the top five losers were Bharat Heavy Electricals (10%); Jindal Steel & Power (8%); I D F C (8%); N T P C (8%) and Jaiprakash Associates (8%).
Out of 1255 companies on the NSE, 320 companies closed positive, 905 closed in the negative while 30 closed flat.
Top ML sectors   Worst ML sectors  
Software & IT Services 1% Energy -5%
Hotels 1% Con_epc_infra -5%
Auto Components 0% Textiles -4%
Non-ferrous Metals 0% Telecom Services -4%
Chemicals 0% Oil & Gas -4%



Torrent Pharma acquires Elder’s Indian branded formulation business for Rs2,004 crore
Torrent strengthened its position in Indian market by acquiring Elder’s Pharmaceutical women healthcare and pain management business
Torrent Pharmaceuticals Ltd (Torrent) have entered into a definitive binding agreement with Elder Pharmaceuticals Ltd (Elder) to acquire Elder’s branded formulation business in India and Nepal for Rs2,004 crore. 
“This pathbreaking domestic consolidation by Torrent addresses our recent challenges and will significantly help Elder leverage its balance sheet.” Said, Elder chief executive officer and managing director, Alok Saxena "The transaction is a strategic fit for Torrent and will strengthen its core prescription-based business. This acquisition strengthens our position in the women healthcare, pain management & vitamins, nutrition segments by enhancing and accelerating market access. It is also expected to enable cost & revenue synergies in Torrent's domestic formulations business," said Torrent Group chairman Sudhir Mehta.
Elder's existing brand equity in the areas of women healthcare and pain management will help Torrent strengthen its position in the Indian market expanding into these fast growing areas, said Torrent in their filing with stock exchanges.
Torrent would fund the acquisition through a mix of internal accruals and bank borrowings. Under the proposed transaction, Elder will continue to manufacture & supply the products at its existing manufacturing facilities for Torrent for a period of three years.  Torrent said, the transaction has been approved by the boards of both the companies and is subject to approval by shareholders and other necessary regulatory nods. The deal is expected to close in the first half of 2014.
On Friday, Share prices of Torrent Pharmaceuticals Ltd closed 4.04% down at Rs479.50 on BSE. Elder Pharmaceuticals share prices closed 8.17% down at Rs298.30 on BSE, While benchmark S&P BSE Sensex closed 210 points down at 20,715.


New monetary policy framework of RBI to focus on inflation

According to Nomura, a change in the RBI's monetary policy framework with a focus on CPI inflation as the new nominal anchor would have important macro implications and its success depends on the central bank's commitment and ability to adopt institutional changes after introducing the new regime

The Reserve Bank of India (RBI) has set up a committee under deputy governor Dr Urjit Patel to recommend changes to the monetary policy framework with the objective of making it transparent and predictable. According to Nomura, this may be a move towards price stability or inflation targeting instead of the current multiple-indicator approach.


"A change to the RBI's monetary policy framework with a focus on consumer price index (CPI) inflation as the new nominal anchor would have important macro implications," says Nomura in a research report.


However, for inflation targeting to be successful, certain preconditions have to be in place, the report says. "In particular, this calls for full autonomy to be given to the RBI, strict fiscal discipline by the government and a robust banking system. Evidence shows that most countries built up these conditions gradually after adoption."


India's monetary policy framework has been evolving over the past few decades, consistent with the openness of the economy and with the development of financial markets. In April 1999, the RBI introduced the liquidity adjustment facility (LAF) operating through the repo and the reverse repo rate, resulting in dual policy rates. In 2011, the weighted average overnight call money rate was recognized as the operating target of monetary policy and the repo rate was made the sole policy rate. However, the RBI’s liquidity tightening measures – in response to exchange rate depreciation in mid-2013 – made the marginal standing facility (MSF) rate the effective policy rate, diluting the role of the repo rate since then.


The RBI has historically followed a multiple-indicator approach, targeting various inflation metrics like CPI, WPI, core WPI, core CPI, inflation expectations, growth, and fiscal and current account balances, among other variables, sometimes according to its own convenience. This has made monetary policy unpredictable for market participants at times and has also hurt the RBI's credibility as its goal or “the nominal anchor” is unclear.


According to Nomura, the key focus of the Urjit Patel Committee recommendations will be to make the monetary policy framework and/or operative procedure much more transparent and predictable


Price stability instead of a multiple-indicator approach:

We expect the committee to recommend a move towards price stability, i.e. low and stable inflation as the sole policy objective instead of the current multiple indicator approach. Although the multiple indicator approach has worked well so far, the RBI has only one instrument (interest rates) to achieve multiple goals, which may be distracting it from achieving its central objective of price stability.


The move from a multiple-pillar approach to inflation targeting has to be gradual. The main features of inflation targeting are its medium-term focus, the use of an inflation forecast and the explicit public announcement of an inflation target or sequence of targets.


CPI inflation as the new nominal anchor:

The committee will recommend a new nominal anchor for monetary policy. A nominal anchor is a variable that monetary policy can use to direct the expectations of economic agents regarding price levels in the economy and what policy makers may do to achieve them.


India currently has no nominal anchor and there is substantial confusion as to whether the RBI is targeting the WPI, the CPI, a combination of the two or their core measures. In our view, the RBI will move away from WPI inflation as its primary inflation target because it largely reflects tradable goods price inflation, which is more relevant for producers and does not capture inflation in non-tradables (services), which is more relevant for consumers. We believe the debate is more likely to focus on the benefits of adopting headline CPI versus core CPI inflation as the new nominal anchor.


Headline CPI inflation is driven largely by food price inflation and hence is susceptible to supply shocks. The advantage of targeting core CPI inflation is that it excludes the volatile food and fuel categories and includes a basket of services or non-tradable goods. But ignoring headline CPI inflation has its own pitfalls. Food price inflation plays a crucial role in driving inflation expectations in India, which drives wage-setting behaviour and in turn affects core CPI inflation. Headline CPI inflation is also easier to communicate and to understand even for an average household. Therefore, we think it more likely (65% probability) that the RBI adopts headline CPI inflation as the new nominal anchor, and assign a 35% probability to it adopting core CPI inflation as the new anchor.


Numerical inflation targets:

Having adopted an inflation target, we would expect the committee to recommend a numerical inflation target or a sequence of targets that the RBI should announce on CPI inflation and to which it will be held accountable. We believe that the committee may recommend target ranges to which CPI inflation needs to be reduced over time. This may involve requiring that CPI inflation be brought down to 8-8.5% in the next year (11% currently), to 7-8% over the next two years and so on. A staggered and gradually falling inflation target would make it appear more credible.


Continue with the existing liquidity framework:

We expect the RBI to broadly stick to its current framework of: 1) keeping liquidity in deficit for better policy transmission; 2) the repo rate being the sole policy rate and 3) the weighted average overnight call money rate being the operating target of monetary policy. Hence, one instrument (repo) and one target (CPI) appears to be a more likely outcome. Tight liquidity with a greater reliance on the term repo facility to meet the liquidity mismatches would help develop the term money market and encourage banks to rely more on their own deposits for lending.


Impediments to policy transmission: The committee has also been asked to look into the less-than-desirable transmission channel of policy repo rates to bank lending and deposit rates (Figure 4). Historically, liquidity has been an important driver of transmission as it drives banks? cost of funds. Hence, tight liquidity during a hiking cycle (or easy liquidity during an easing cycle) is necessary to accelerate transmission from policy to bank lending/deposit rates.


However, government finances have wreaked havoc with the RBI’s liquidity calculations in the past through either a sudden burst in spending (higher liquidity) or sudden fiscal austerity (liquidity tightening). One way to resolve this is to auction the government's surplus cash balances, which are currently held as deposits with the RBI (Mohanty, 2011). Additionally, government interference in public sector banks’ interest rate decisions needs to be curtailed. Further, increasing the penetration of the banking system is essential to increasing and speeding up the transmission of monetary policy to the real economy.


Setting up a monetary policy committee:

Currently, the RBI has set up a technical advisory committee, which advises it on the desirable stance of monetary policy. However, the final rate decision rests solely with the RBI governor. We believe that the committee could recommend setting up a monetary policy committee with voting members to decide on policy rates with members possibly drawn from the RBI, Ministry of Finance, academia and the corporate sector.


Greater transparency and communication policies:

As recommended by the Committee on Financial Sector Reforms (2009), the RBI could develop and make public its inflation model to give some guidance to market participants on monetary policy decisions. As price stability becomes the RBI's primary mandate, it could produce its own version of the inflation report, which provides detailed economic analysis and inflation projections, on the basis of which interest rate decisions are made. Detailed minutes of the RBI's monetary policy committee may also be publicly released.


According to Nomura, The move from one regime to another cannot be sudden. First, CPI inflation is driven not just by demand, but also by fiscal policy, indexation and other supply-side factors. Hence, if the RBI moves towards a CPI inflation-targeting regime, government policies need to be prudent, otherwise the RBI may end up setting targets that are too ambitious, thereby hurting its own credibility. A central bank can always lower inflation – it has the tools to affect relative prices – but at the sacrifice of growth.


Second, moving to a CPI regime suggests that interest rates will remain higher for longer. We expect CPI inflation to remain elevated at above 9% y-o-y over the next year as well, which will necessitate further policy action. We are currently pencilling in a cumulative 50bp repo rate hike to 8.25% in 2014 and our bias is to the upside. 


Third, although there would be some growth sacrifice in the near term, a successful inflation-targeting framework should have positive medium-term benefits for India, Nomura added.


The report of Urjit Patel Committee is due around the end of December.


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)