Markets await rollout of policy action

July 14, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

We saw some tiredness in the markets with subdued optimism as compared to the previous 4-5 weeks as the bouncebacks were not as sharp and strong. The Nifty tended to close at the lower end of the band at 5227, a fall of about 80 points. A major disappointment during the week was the below-expectation result from IT bellwether Infosys followed by a lower annual guidance.

May IIP data showed a moderate growth of 2.4 pct which was above expectations after two consecutive months of de-growth. The monsoon too was catching up, though it is still seen to be deficient by 23 pct with Karnataka and Maharashtra being worry spots. The India Meteorological Department (IMD) had last week spoken about the possibility of the occurrence of El Nino which is associated with low rainfall. We should be able to gauge the impact by the end of July.

The government has initiated the process of building trust amongst the foreign investor community, though policy reforms are yet to see the light of day. On Friday, Manmohan Singh set up an expert panel to finalise the General Anti-Avoidance Rule (GAAR) with just one representative from the tax department, sending out a strong signal that the tough stand taken by his predecessor would be diluted to a large extent. FIIs too seem to have taken a cue, making substantial purchases to the extent of $550 mln in the last seven sessions.

The much awaited meeting of the Empowered Group of Ministers (EGoM) on telecom was held last week and they are expected to complete the auction of spectrum by August 31, the deadline fixed by the Supreme Court. The EGoM decided that mobile phone companies could mortgage airwaves, a move that will allow telecom companies to use spectrum as collateral and raise funds from banks for upcoming auctions. Needless to say, this decision was welcomed by the telecom companies as well as markets.

The widely discussed and politicised presidential elections will culminate on July 19. The markets are waiting with bated breath the rollout of reforms once the elections are through. Prime Minister Singh has been sending out all the right signals ever since he took over the finance portfolio. It is left to be seen whether he’ll be able to shrug off the “Underachiever” tag bestowed on him by Time magazine last week.

The first quarter June 2012 earnings season began on a mixed note. IT majors Infosys and TCS came out with the quarterly numbers and contrasting performances (vis-à-vis consensus expectation) by India’s two heavyweights made one wonder whether they are operating in similar environments. Even the management body language was a contrast with Infosys turning defensive. I have been maintaining that the best is behind Infosys and unless they re-engineer themselves, they could be headed for difficult times. A leader can remain a leader only if it modifies its strategies to suit the market conditions and not vice-versa. We could see some institutional movement from Infosys to TCS though the former is quoting at a significant discount. HDFC Bank beat forecasts by a 31 pct jump in quarterly profits led by a stronger loan book, NIMs and fee income.

The rupee closed at 55.15, finally getting support from favourable trade deficit data which dropped to a 15-month low of $10.3 billion in June. As mentioned in my previous column, I hope this along with policy action would act as a break to the vicious cycle as every rupee gain against the dollar will lower the trade deficit as long as oil prices remain under check. The RBI is already looking to indirectly curb gold imports as it mulls over alternative investment avenues as a hedge against inflation.

Internationally, Moody’s Investors Service cut Italy’s bond rating to Baa2 from A3, with a negative outlook on expectations of a sharp increase in funding costs. As more negative news continues to flow from the euro zone, individual governments are finding it difficult to finance their budget due to record high borrowing costs. In the East, China reported second-quarter growth in line with expectations of a slowdown which in turn weakened other Asian currencies. This is another point of worry for global commerce which is already feeling the heat of the LIBOR scam.

Though not much has changed with respect to the macroeconomic scenario for India, certain factors — such as a fall in commodity prices especially crude oil, expectation of key reforms from the Prime Minister — do stand to provide a ray of hope in the future. These factors would be watched keenly by the markets, which would reflect any sign of waning optimism on the reforms front by the government.

In the next two weeks, we could either have a breakout or a breakdown depending on the policy action or inaction.

In the near term though, quarterly corporate earnings, monthly inflation data and the progress of the monsoon will dictate the trend. The markets this week could be range-bound with a positive bias awaiting the action-packed week starting July 23.

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