The latest series of contingency measures in the euro zone, including the bail-out of Spanish banks, may or may not succeed in stemming the rot as intended. However, it has certainly had a beneficial impact on Indian markets.
In the past two weeks, foreign institutional investors (FIIs) have bought a net Rs6,770 crore of Indian equity with the concomitant effect of retarding the USD’s bull run. The measures taken by Dr Singh to attempt to clarify the General Anti-Avoidance Rules (GAAR) may have been a confidence booster but the liquidity would not have been available without Europe.
Despite the forex inflows, Indian stock markets have lost a little ground in the past fortnight. Domestic institutional investors have been consistently negative in outlook and they’ve sold close to Rs1,900 crore of equity. Retail and operators have also been negative in attitude, apparently viewing this as an opportunity to cut losses.
The erosion of faith on the part of domestic investors mirrors a continuing slowdown in India’s growth momentum. This is also reflected in the latest Index of Industrial Production (IIP) data. The IIP shows a trend of weak recovery, with a 2.4 per cent rise in May 2012, after two months of negative growth. Taking April and May together, the IIP has seen 0.8 per cent “growth” in the first couple of months of 2012-13. Capital goods output continues to contract and so does mining. There’s been some uptick in electricity generation but that could be a seasonal effect.
|Current (July 13)||Value
14 days ago
|Index dividend yield||1.53||1.51||0.02|
|Index Book value||2.99||3.02||-0.03|
|USD-INR (RBI Ref rate)||55.656||56.309||1.16|
|FII net buys/sales(Jul 01-14)*||6770.64||2464.66 (Jun 15-30)|
|DII net buys/sales (Jul 01-14)*||-1916.78||-188.21(Jun 15-30)|
|*Rs crore, July 13 provisional figures|
There’s unlikely to be a rescue act from overseas growth. Exports fell four per cent in May, while imports fell 7.4 per cent. The weaker rupee didn’t bring in much in the way of tangible benefits. However, the lower international prices of crude had a welcome impact on imports. The trade balance could correct “naturally” to more sustainable levels if crude continues to be soft. It remains to be seen if there is a review of the APM to rationalise subsidy policy. As things stand, there are rumours of an increase in diesel price after the presidential elections (August 7).
The IT sector is likely to deliver a muted performance as well. Infy has cut guidance along with its below expectation Q1, 2012-13 performance. By and large, Infy’s guidances and cuts thereof have been an accurate harbinger of overall sector performance. Tata Consultancy Services (TCS) has done much better, but TCS also has developed a habit of consistently outperforming its sector peers. So, the prudent investor is more likely to align expectations along the lines suggested by Infy’s guidance.
IT is de-linked from other sectors owing to its external exposures. It is also among the first sectors to release financial results. One hopes that it doesn’t presage a similar flat or lower trend across other industries. Among other early releases, HDFC Bank has returned a reasonable performance. We should have a clearer picture over the next fortnight. Expectations aren’t high.
Some other bad news pertains to the consumption story. Auto unit sales across the first quarter have been much lower than expectations -- probably as slow as it’s been in the past nine years. The Society of Indian Automobile Manufacturers (SIAM) has cut its 2012-13 forecasts.
Lower vehicle sales are probably the single-most accurate indicator of consumer sentiment. The auto industry’s fortune also directly affects a vast array of industries, ranging from commodity metals to finance to electronics, owing to the complex value chain. SIAM leavened its forecast cut with the hopes that there may be a second half pickup. This is monsoon-dependent and, so far, the rainfall has been deficient.
Thus far the picture doesn’t look pretty. Flattening growth could be further dampened if the consumption story breaks down. Market indices have stayed up mainly because of overseas liquidity, which is scarcely reflective of a genuinely favourable investor environment.
The Reserve Bank of India’s (RBI) next credit policy review will probably not raise rates. The weak IIP and lower crude prices mitigate against further rate increases. But the central bank might not lower rates by much either, if it does so at all.
In any case, a rate cut by RBI will not be enough to put the animal spirits back in the economy. If Dr Singh is going to do this, he will have to take fast and decisive policy action. His political window of opportunity may be quite small. There’s bound to be a Cabinet reshuffle after the presidential election and it’s quite likely that he will relinquish the finance portfolio.
There’s no dearth of things that need to be done to improve action on the supply-side. Dr Singh has outlined many of them in his own speeches. Whether he can actually circumvent the Scylla of Didigiri and the Charybdis of the National Advisory Council and accomplish any of them is unlikely.
Technically, the market is range trading with a certain amount of fence-sitting evident. There will be a continuous reappraisal as major corporations release their Q1 results and advisories. There’s room for a five per cent swing in either direction over the next three weeks. As of now, the odds are a little in favour of an upswing. The Nifty is well above the 200 Day Moving Average.
The FIIs are currently bringing in enough cash to balance off negative local sentiments. There are chances of increasing FII inflows whereas local selling is unlikely to increase much in terms of volumes. The Bank Nifty is likely to remain buoyant until the RBI’s next credit policy at least.
It’s not a great environment for the long-term investor. But if the rate cycle has peaked out and inflation does ease and above all, the external situation doesn’t develop further complications, it’s not a terrible environment either.