Expert Zone

Straight from the Specialists

India Markets Weekahead – Volatility seen as RBI policy review in focus

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

Volatility is here to stay and trying to predict the markets on a daily basis is a futile exercise. It’s no better than tossing a coin.

Monsoon rains are early and heavier then normal, raising the hopes of green shoots in the next few months. Macro numbers were showing signs of bottoming out but the rupee slide has thrown calculations awry. A feeble request by the finance minister urging people to shun gold won’t do much good in a country enamoured by gold.

An amnesty scheme would have been one of the ways of shoring up foreign exchange reserves but the affidavit filed along with the Voluntary Disclosure of Income Scheme in 1997 bars the government from launching a similar scheme.

Benign inflation figures would have encouraged the Reserve Bank of India (RBI) Governor to cut rates further but inflation in terms of currency depreciation could deter him from doing so. The delay in economic recovery may lead to further non-performing assets that could add further stress to bank balance sheets.

Why the RBI should cut rates again

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

In May, the Reserve Bank of India (RBI) had hesitatingly cut the repo rate by 0.25 percent, which made no impression on the stock market or commercial banks. That was because both expected the cut to be more substantial. But the RBI had not obliged.

Perhaps the monsoon, which arrived on the dot and is progressing satisfactorily, may make some difference to the RBI’s expectations of food inflation – which had been its principal reason for hesitancy. While it’s too early to predict monsoon behaviour for the rest of the season and the likely improvement in agricultural production, it does appear the improvement should be significant and inflation dampened perceptibly. Reduction in inflation, however, is not the only reason why the interest rate should have been cut.

The road to smart technology

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

The Sixties witnessed the world’s first major technology wave with the rise of the mainframe, which had a dramatic impact on business processes and continues to do so even now. The second wave was the rise of the mini-computer, which had ease of use and was affordable. The third has been the PC, which needs no introduction, and the Internet is the fourth.

The Internet has changed the way business is conducted across the world and has had an impact on how we work, shop, socialise and interact. And now smart mobile technology really does look set to be the fifth major technology wave. What is of even greater interest is that we may be looking at a technology growing faster than any other in history. It took landlines nearly 100 years to reach saturation. Mobile technology reached saturation within 20 years and smartphones are set to do so in less than 10.

Will the rupee fall further?

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

On May 31, the rupee fell to an 11-month low of 56.51 to the dollar. It wasn’t the only currency to suffer a loss. Most currencies depreciated during the month; some more than the others.

The appreciation of the dollar reflects an improvement in the performance of the U.S. economy and partly the related possibility of the phasing out of quantitative easing (QE) by the U.S. Federal Reserve. The latter would make the dollar even scarcer.

The threat of a junk rating

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

Credit ratings by agencies are never very objective and their long-term outlook is also seldom accurate. Sovereign ratings, in particular those which are not solicited, are generally unreliable and often biased. But rating agencies do draw attention to critical issues that should not be ignored.

Standard & Poor’s announced on Friday that it had maintained India’s rating at BBB- with a long-term negative outlook. This assessment is based on three major considerations. The budget deficit, government debt and the current account deficit (CAD) are too high.

The resurrection of Congress

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(This piece comes from Project Syndicate. The opinions expressed are the author’s own)

The overwhelming victory of the Indian National Congress in elections in the important southern state of Karnataka in early May has shaken up the country’s political scene. India’s troubled ruling party had appeared headed downhill in the build-up to the next general elections, which must be held by May 2014. Now, following its huge win in Karnataka, all bets are off.

India Market Weekahead – Inflation, FII inflows to be key

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

The bulls are back and their four-week winning streak saw the Nifty close at a 29-month high of 6107 on Friday, up about 2.75 percent for the week. Liquidity flows remain robust, fuelling the momentum despite political heat in New Delhi.

The Congress win in Karnataka boosted positive sentiment, followed by industrial output data that was marginally better than expectations. The overall earnings season has been favourable and along with the global rally provided the right environment for the markets to cross the psychological barrier of 6100 in the Nifty and 20000 on the Sensex. The only thing missing is euphoria on the street and broader participation by investors.

The uncertainty principle and the India-Pakistan relationship

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(Any opinions expressed here are those of the author and not of Thomson Reuters, the IDSA or the Indian government)

“The more precisely the position is determined, the less precisely the momentum is known in this instant, and vice versa,” said Werner Heisenberg in his 1927 paper on subatomic particle behaviour in quantum physics. While the context could be continents apart, this uncertainty principle perhaps best describes the trajectory of India-Pakistan ties.

Decoding Subbarao’s signals

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

When Reserve Bank of India (RBI) governor Duvvuri Subbarao announced last week that the central bank was cutting its policy interest rate for the third time this year, he also made a statement that may well have been directed as much to watchers of the Indian economy as to its managers. His message to the government, originally coded in technocratic diplomacy: It’s time for you to do your share in reviving growth.

Financial markets had widely anticipated the RBI would cut its repo rate by 25 basis points (bps). However, they also expected its policy guidance to adopt a less hawkish tone than in the two prior cuts. After all, inflation had continued to ease and the economy still needs all the support it can get to come back on the growth path. Instead, Subbarao was categorical in saying that the “growth-inflation dynamic yields little space for further monetary easing.”

Why is RBI chief Subbarao so cynical?

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

In its policy review on May 3, the Reserve Bank of India (RBI) did bring down the repo rate by 25 basis points but it also presented a gloomy outlook on growth and inflation which left the stock markets cold. The Sensex, which had surged in anticipation, fell 160 points. What makes the RBI so negative when even rating agencies are inclined to accept the emergence of green shoots?

RBI Governor Duvvuri Subbarao has himself spelled out the risks. “Upside risks are still significant in view of sectoral demand supply imbalances, the ongoing correction in administered prices and pressures stemming from increases in minimum support prices,” he said. Is Subbarao’s risk assessment genuine or has it been exaggerated to put the government under pressure?

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