Some nervousness, overall stable

The global trade war has intensified with China and India imposing retaliatory tariffs on US goods. Russia is threatening similar action and the EU and Canada are also considering it. This is the sort of “Beggar my neighbour” tit-for-tat strategy that led to the Great Depression of 1929-37. Every nation loses out and global trade volumes could decline if this escalates.

Indo-US trade amounted to $126 billion last year. India has imposed retaliatory tariffs on 29 types of US exports. The new duties are expected to raise $240 million to compensate for the higher duties that the US has recently imposed on Indian exports.

In another global development, the Opec meeting in Vienna ended with commitments to push up production from the cartel. But it's unclear how much more the Opec can pump,  given instability in Venezuela and Libya, and the  renewed sanctions against Iran. Some analysts estimate that it won’t amount to more than 700,000 barrels per day. However global crude prices have stabilised at lower levels after a great deal of volatility last week.  One rule-of-thumb calculation suggests that a change of $1 per barrel in crude prices leads to a change of $1 billion in India’s current account. If prices do subside, that could be very useful to India.

Three key central bank policy updates came in at various times during the last fortnight. The US Federal Reserve hiked its policy interest rates  — the so-called "Fed Funds" and it will probably hike at twice more in the calendar year. The Fed is also continuing with its quantitative tightening programme; reducing the massive bond portfolio it created during the years of quantitative easing. The European Central Bank held its negative policy interest rate. But it will cease its ongoing QE by December 2018. The Bank of Japan held both its negative interest rate and continued its ongoing QE. Net-net, the supply of cheap hard currency will tighten and it will get more expensive and scarce as the ECB tapers.

This prospect of hard-currency tightening is leading to foreign portfolio investors pulling out of emerging markets. FPI selling has been visible in every major emerging market including India. It has been a major factor in the rupee coming under pressure as well. Yields have risen in the Indian bond market as a result of this, as well.

While crude prices falling could help to reduce inflation, a delayed monsoon could lead to rising food prices. The monsoon has been delayed, or at least, it’s been under-par so far, with rain well below normal in the first three weeks. The IMD (India Meteorological Department) says the monsoon should revive very soon. Let’s hope this is true.

The government is considering “selling” a stake in IDBI Bank to LIC and has approached the Insurance Regulatory and Development Authority of India (IRDAI) for the necessary clearances. This proposal will be considered at the IRDAI Board meeting next week. It has already been cleared by the LIC board.

There are multiple issues with the concept. LIC is government-controlled but a large chunk of its revenue comes from policy premiums. So this bailout directly involves using citizens’ cash. Like all insurance companies, LIC is also supposed to avoid risk-concentration — insurance companies are not allowed to own more than 15 per cent of any single company. However, IRDAI could, given arm-twisting from government, permit LIC to buy now and reduce stakes over several years.

LIC already holds 10.82 per cent of IDBI Bank. The GoI owns 80.96 per cent stake and seeks to sell 40 per cent. This could cost LIC another Rs 100 billion, based on the market valuation of Rs 250 billion. IDBI is among the very worst of PSU banks. Gross non-performing assets (GNPAs) amount to Rs 556 billion, about 28 per cent of all advances.

It is a travesty to call this a “disinvestment” — the government will dip into public subscribed funds and maintain 100 per cent control.  However, the government will, no doubt, claim it as such, compensating for the failure of the Air India deal.  Meanwhile ICICI Bank has appointed Sandeep Bakhshi to act as CEO while Chanda Kochhar goes on leave until the Justice Srikrishna probe into the Videocon case concludes. This is the first signal that the ICICI Board is taking the conflict of interest charges seriously.  

In some good news for genuine disinvestment, the IPO of RITES, was highly successful. The price band for the issue was fixed at Rs 180-185 a share (with a discount of Rs 6 per share for retail shareholders and employees), and the government should raise over Rs 4.6 billion by selling 12.6 per cent stake. The IPO was over-subscribed 67 times.

The market sentiment remained more or less stable last week, with undertones of nervousness. Retail investors are selling direct equity but they continue to invest heavily via mutual funds. Other domestic institutional investors are also buying heavily to counter-balance FPI selling.

The technical position is very hard to read. The major market indices remain range-bound even though smallcaps and mid-caps have dipped considerably. The Nifty continues to oscillate between 10,400-10,900 and we’ll just have to wait until there's some sort of decisive breakout because we can call a trend.