India Market Weekahead: Time to buy after a period of caution
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Markets opened with a healthy dose of optimism last week. Two big events were expected to boost sentiment. On the global front, Greece election results eased fears of immediate global financial turmoil. Back home, expectations were high of an interest rate cut by the Reserve Bank of India (RBI) to boost the falling economy.
The RBI rate cut has been viewed as a panacea by the markets for quite some time. Belying high expectations, the central bank kept both repo rate as well as CRR unchanged on mounting inflation worries leaving India Inc and the markets sorely disappointed.
The RBI expressed its intent of prioritising the management of liquidity and of continuing to use open market operations (OMOs) as and when necessary to contain liquidity pressures. The central bank has stated that any further rate cut in the short term would be on the basis of growth-inflation dynamics and the government’s fiscal consolidation initiatives. The onus for action now lies squarely on the government.
Another event that has placed the government’s inaction under the spotlight was the downgrade of India’s credit outlook by rating agency Fitch from stable to negative. This comes close on the heels of Standard & Poor’s warning of India losing its investment grade. The agency supported the downgrade on the basis of lack of credible government action on policy and reforms as well as the growing menace of corruption stalling the growth prospects of the country.
Hurt by dollar demand, both speculative as well as well from oil companies, the Indian rupee witnessed a sharp slide this week. At 57+, the rupee plunged to record lows, its worst weekly fall in nine months. A weak rupee offsets the benefit of lower global crude oil prices which in turn would aggravate inflation. It remains to be seen what impact the currency would pose for India Inc numbers as a falling rupee would lead to an increase in the cost of imported inputs in spite of falling commodity prices, huge forex losses as well as impacting the cost of borrowing for the corporate sector in turn weighing on profits.
The cement sector was in for a big jolt as the Competition Commission of India (CCI) penalised 11 companies a combined penalty of 63 billion rupees for cartelisation. Stocks reacted mildly as this sword has been dangling for a long time and was getting discounted. Secondly, this matter will be contested and could drag on.
Markets have been closely watching the progress of the monsoon. The India Meteorological Department (IMD) maintained its earlier forecast of a normal monsoon this year — 96 pct of the long-term average overall, down from its April forecast of 99 pct. As 55 pct of the country’s arable land is dependent on the monsoon for irrigation, and as the sector accounts for approximately 15 pct of the economy, it plays a significant role in the economic growth of the country. As of now, there is no reason for cheer on this front.
Internationally this week, a key EU summit is scheduled on June 28 and 29 to discuss the ongoing euro zone crisis. The summit is intended to moot the setting up of a banking union with the aim of finalising a broad plan by December. Though anticipating any definitive solutions would be foolhardy, any plausible proposal with a realistic timeline in place would be cheered by the markets though all of us are aware that the inevitable can’t be pushed to eternity.
Finance Minister Pranab Mukherjee is expected to put in his papers next week as he enters the presidential race. The question left to be answered is who would hold the reins of the finance ministry. The beleaguered markets would surely welcome the prime minister holding an additional finance portfolio or an experienced bureaucrat such as C. Rangaranjan.
Every event over the past couple of weeks, both internationally as well as at home, that has affected the country had the stakeholders screaming for reforms. As the finance minister, whose socialist-era styled policies has left a bad taste in the mouth for both domestic as well as global investors is set to go; it is imperative for anyone who now inherits the portfolio to straighten things out and initiate “confidence building” measures immediately.
Reforms have ceased to be a matter of choice; rather it has snowballed into a compulsion for the government. With less than two years left for the general elections in 2014, the UPA government should push through reforms and policies that have been languishing for the want of political will, if it wants to be in the reckoning. And I believe the ground is set for the same due to the changed political equations post the presidential nomination fracas.
The market may experience volatility next week due to expiry of the June series but it’s again a time to buy as the current “do or die” situation will force the government to act. There could be some announcements on Monday as indicated by the outgoing finance minister.
In my view, the markets are set to witness a string of reforms and policies in the coming months which should be able to reverse the vicious cycle we are in and the weakening global commodity prices would be another huge trigger going ahead.
The market behaviour in the last two months has shown great resilience to adverse news flows which got discounted immediately and has cheered positive news which came its way. Based on this and hopes of reform, the markets are poised for a rally to 5300-5400 with support around 5000/5050 for the Nifty.