Expert Zone

Straight from the Specialists

Overseas cues to drive market but policy paralysis may cap gains

By Ambareesh Baliga
September 8, 2012

(The views expressed in this column are his own and do not represent those of Reuters)

The European Central Bank (ECB) came to the rescue of world markets including India, which had a spirited rally on Friday to wipe out the losses of the past two weeks. The rally continued during the special session on Saturday to close the week at 5359, gaining about 1.9 pct. The week started on a positive note due to the recommendation on General Anti-Avoidance Rules (GAAR) dilution but failed to maintain momentum due to various disappointing data points as well as the political imbroglio.

During the week, the Nifty threatened to break the crucial support at around 5200 levels. The woes of the government continued with more skeletons tumbling out of the “Coalgate” scam and a parliament logjam continued till Friday, ending the second worst parliament session in history. This sums up the current political situation where the government is stuck in a quagmire of scams, unable to take any concrete steps, thus pushing the economy and the “India Story” into the trash can.

The much awaited fuel hike has been postponed for a while longer, awaiting a political consensus. Oil Minister Jaipal Reddy rightly stated that “fuel price is a classic case of politics defeating economics” and probably scams are defeating the spirit of the “India Story”.

Manmohan Singh was again under fire from international media for his performance. The indications within and outside the government suggest we are reaching a political and economic nadir which could trigger the announcement of parliamentary elections before 2014.

The big story for the week was the ECB’s decision to maintain the rate and the announcement of a conditional unlimited sovereign bond buying program between 1-3 year maturities. The only hitch in implementation would be the approval required from the constitutional court of Germany which would ratify German participation. U.S. jobs data showed a worse-than-expected slowdown in the market. Although this could raise hopes of a Fed stimulus on September 12, it is a disappointment after a spate of positive data points.

Closer home, the data points didn’t have any reasons to cheer. The July balance of trade showed that exports dropped sharper than imports, widening the trade deficit to $15.5 billion. The steep correction in imports in the past few months was due to lower gold imports and falling crude prices. Gold imports seem to have bottomed out though they may not recover immediately. Gold prices, however, have rallied sharply. Oil prices too have bounced back, thus negating the benefits reaped in the past few months. Oil consumption too is not showing any signs of slowing down as subsidised diesel prices are an incentive to consume more at the cost of the exchequer.

India’s manufacturing sector too saw the lowest growth in August due to falling export orders and the grid failure which paralysed North India. The HSBC PMI eased to 52.8 in August from 52.9 in July.

The monsoon was in full fury during the week all across India except in the east and northeast, thus reducing the deficit to 10 pct from 12 pct last week. As I have been mentioning earlier, this may not help ease food inflation but will surely ease the drought compensation pressure which was imminent in the beginning of August.

Axis Bank was downgraded by Morgan Stanley due to the fear of increase in non-performing assets. The stock corrected sharply by about 7 pct but bounced back smartly to close without any damage at 979 rupees. The Comptroller and Auditor General (CAG) has been on an overdrive post the “Coalgate” revelations. After pulling up ONGC last week for being tardy by not placing desired emphasis on discovering oil and gas, it has criticised the Gas Authority of India for supplying cheap gas to private power producers. The information technology sector was the outperformer for the week while metals were the weakest of the lot.

Advance tax data should start flowing in by the end of next week. Though we don’t expect fireworks, any major negative divergence could take the steam off the rally. The Federal Open Market Committee (FOMC) meeting and the German Constitutional Court decision on September 12 would be closely watched.

The markets have bounced back sharply and have crossed immediate resistance levels. The renewed liquidity flows could take it closer to recent highs but again it would be an opportunity to book profits. The rally after the ECB announcement reminds me of the story of a poor man forced by the king to stand in the middle of a cold pond at night. He imagined feeling warm by watching a candle lit far away. Unfortunately, I can’t see the daybreak for this long night India is facing and we can’t continue fooling ourselves that the intent of our lawmakers will be converted into policy action in the near future.

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