Expert Zone

Straight from the Specialists

India Market Weekahead – Volatility expected ahead of RBI policy review

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

After a rally of 500 points on the Nifty, markets consolidated at slightly higher levels to close at 5850 this week. It’s evident that hope keeps the market ticking — this time it was various measures by the new RBI governor, Raghuram Rajan,that cheered the markets.

But expectations, at times unrealistic, could lead to disappointment. Though Rajan made the right moves, it would be interesting to see how he uses the limited manoeuvrability he currently has. The monetary policy review on September 20 would be closely watched.

Macro numbers such as IIP and consumer inflation were better than expected at 2.6 percent and 9.52 percent. Trade deficit narrowed to $10.9 billion while car sales rose for the first time in 10 months. Although IIP data was positive, a closer look shows capital goods growth, which has been highly volatile, was responsible for the better-than-expected numbers.

Consumer inflation showed divergent figures between urban and rural data. The trade deficit narrowed thanks to a restriction on gold imports while car sales were up on Maruti’s low base after being hit by strikes last August.

Raghuram Rajan and the rupee

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

With Raghuram Rajan taking over as the governor of the Reserve Bank of India (RBI), it’ll make for a change in the central bank’s policy perception.

His predecessor Duvvuri Subbarao used conventional methods and got no results. It is likely Rajan will opt for innovative means and his initial steps are already showing results. It’s evident that the complex problems of today demand out-of-the-box solutions.

Asian bonds: rising discrimination

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

Ever since reports emerged that the United States might taper off its bond-buying program, emerging markets have whipsawed: falling currencies, rising rates and fleeing funds. India and Indonesia have been two of the most affected countries in Asia.

The Asian dollar bond markets have also been affected by the fear of tapering. On the one side, longer-term bonds have lost substantial value as U.S. interest rates have picked up. Additionally, investors have discriminated between bonds from vulnerable countries and those from stronger countries.

Time to brace yourself for a hard landing

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In his speech to parliament last week, Prime Minister Manmohan Singh said: “The depreciation of the rupee and rise in dollar prices of petroleum products will no doubt lead to some further upward pressure on prices. The Reserve Bank of India will therefore continue to focus on bringing down inflation.”

By saying this, the economist in Singh seems to have won against the politician. This has also been a vindication of sorts for outgoing RBI Governor Duvvuri Subbarao.

India Markets Weekahead: Cash is king

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(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.

Asian financial crisis and lessons for India

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Several economists have gone to great lengths to say that India in 2013 is not facing a repeat of the 1991 balance-of-payments crisis or the Asian financial crisis in 1997. Clearly, the crisis India faces now is unique – as most economic crises usually are.

That does not mean there is nothing to be learnt from past crises. We believe there are several similarities between the Asian one and India’s situation today.

The rupee on a crash course

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

Given the kind of volatility in financial products and asset classes that we have seen in India and some emerging markets over the last few weeks, it’s likely to be a long winter for the Indian economy.

The rupee is at an all-time low against the dollar, FIIs are big sellers in Indian debt and equity markets, the Sensex is falling and bond yields have risen. Adding to India’s misery, there’s no sign of inflation easing or interest rates coming down in a hurry. The twin deficits – fiscal and current account – are at levels that could expose the economy to a potential rating downgrade.

No quick fixes to India’s growth problems

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

Over the past year, the government has silenced its critics with several pro-reform policy initiatives including the relaxation of FDI norms, freeing FII debt investment limits and a calibrated deregulation of petroleum prices. These reforms were cheered by the markets by way of increased FII inflows.

India’s widening twin deficits – fiscal and trade – appeared to have been reined in. But in the first few months of the fiscal year 2013-14, everything seems to have come undone for India – be it the potential end of the U.S. Federal Reserve’s quantitative easing policy or the dollar’s appreciation against emerging market currencies.

When will the rupee stabilize?

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

The rupee hit a series of record lows in August, rattling the stock market and forcing policymakers to step in. But the fall was necessary to correct India’s past mistakes and improve the dynamics of the economy. Stock markets were jolted because the rupee’s slide was sudden. But then that is how markets behave.

International markets, be it for currencies or commodities, are sensitive and therefore volatile due to underlying speculation that is difficult to control. Eventually, however, a stable point is reached at which point they settle down.

How to rescue the falling rupee

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

I can’t predict where the rupee will eventually land and I don’t think anyone else can either.

Of course, we are not the only country at the mercy of the dollar because almost every emerging market is suffering. But surely, that shouldn’t be any consolation.

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