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Straight from the Specialists

India Markets Weekahead: Cash is king

By Ambareesh Baliga
September 1, 2013

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Around mid-week, the Indian markets seemed akin to a sinking ship which saw unabated selling with Nifty hitting a low of 5,168 on Wednesday, before recovering sharply to close the week at 5,471 on the hopes of concrete action by the government to shore up the sentiments and the Reserve Bank of India’s moves to save the rupee.

The street expected structural reforms from the government to tackle this crisis whereas the textbook solutions of the RBI and the government backfired. The rupee cracked to touch 69/dollar, but recovered to close the week at 66.55.

The Direct Tax Code Bill, which had a slew of measures to tax the rich, was to be introduced in parliament. But a cabinet committee held it back at the last moment.

The other two populist bills – Food Security and Land Acquisition – were passed and both drew a negative reaction.

The Food Security Bill would widen the fiscal deficit which is already tearing at the seams, where as the Land Acquisition Bill will abnormally increase the cost of setting up industries.

Fiscal deficit in the first four months has already touched 63 percent of the full year target.

The GDP for Q1 FY14 came in at 4.4 percent as compared to 4.8 percent for the preceding quarter – the slowest growth in four years. Manufacturing and mining sectors contracted. Scams and the resultant policy paralysis are finally showing their effect on the economy after a lag.

The lethal combination of slower exports and galloping imports of non-essential merchandise, such as gold as well as luxury goods, has resulted in the trade deficit touching $190 billion. Iron ore mining ban as well as discriminatory tariffs has resulted in India losing out on export revenues of $17.5 billion since 2011.

The current account deficit has reached $87.8 billion, which is 4.8 percent of the GDP, from about $ 2.5 billion in 2004-05.

Infrastructural deficiencies and regulatory issues have resulted in contraction of the manufacturing sector. The policy makers could resort to sovereign bonds or any other debt financing to improve the situation temporarily, but unless structural issues are addressed we could be creating a bigger bubble for the future.

Oil prices, which had shot up on possible U.S. military strike against Syria, retreated marginally when UK MPs voted against the motion supporting military action in the British parliament.

High oil price is adding to India’s woes as inflation will shoot up further. It is expected that there could be a sharp hike of 5 rupees for diesel post the monsoon session of parliament which will have a domino effect on the economy.

The incoming RBI governor, Raghuram Rajan, may spur the markets based on the expectation that he may find a solution for the gargantuan problem we are facing when he takes over on Sept. 5.

His recent statements indicate that he will tackle the currency issue, while growth and inflation may be secondary priorities. The current situation requires the RBI chief to throw away the textbook and look at “out of the box” solutions.

The markets continue to be volatile based on various data points as well as statements and inferences from political leaders.

The rally on Friday was attributed to Prime Minister Manmohan Singh’s optimistic comments on the rupee and economy.

The GDP data which followed may get digested over the weekend and may not lead to a sharp reaction. The markets would await direction from the new RBI governor.

If the United States decides on a military strike on Syria, the markets could face a knee-jerk reaction.

Overall, for the time being, we are in a broad Nifty range of 5,150-5,200 to 5,550-5,600 but the chances of breaking the lower band is quite high.

I don’t expect any immediate breakthrough as we are informally in the election mode and efforts would be to find a quick-fix solution to provide a feel-good effect.

The data points indicate further pain for the economy and I would advise getting into cash. Though valuations look attractive, we should remember that panic situations rarely give weightage to valuations.

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