Key benchmark indices languished in negative terrain in afternoon trade after Reserve Bank of India (RBI) Governor Raghuram Rajan said that the commencement of tapering by the US Federal Reserve will mean a repricing of certain assets with consequent volatility in the global financial markets and that a potential additional source of uncertainty for India is the coming general election. The barometer index, the S&P BSE Sensex, was down 22.62 points or 0.11%, off close to 125 points from the day's high and up about 50 points from the day's low. Investor sentiment was hit adversely after the Reserve Bank of India's (RBI) latest financial stability report (FSR) said that the risks to the Indian banking sector have further increased since the publication of the previous FSR in June this year.
Increase in Brent crude oil prices also hit sentiment adversely. Higher crude oil prices stoked worries of increase in current account deficit and the government' fiscal deficit. India imports around 80% of its domestic oil requirement.
Shares of two-wheeler majors -- Bajaj Auto and Hero MotoCorp-- edged lower. But, shares of a relatively smaller player in the two-wheeler segment, TVS Motors, jumped. Realty stocks edged lower. IT stocks dropped on profit booking after recent strong gains.
A bout of volatility was witnessed in early trade as key benchmark indices trimmed gains after a firm start. The Sensex and the 50-unit CNX Nifty, both, hit their highest level in nearly three weeks at the onset of the trading session. Intraday volatility continued as key benchmark indices reversed initial gains in morning trade. Intraday volatility continued as key benchmark indices slipped into the red once again after moving into positive zone from negative zone for a brief period in mid-morning trade. Key benchmark indices alternately swung between positive and negative zone in early afternoon trade. The Sensex languished in negative terrain in mid-afternoon trade.
At 14:20 IST, the S&P BSE Sensex was down 22.62 points or 0.11% to 21,170.96. The index declined 70.28 points at the day's low of 21,123.30 in morning trade. The index jumped 111.12 points at the day's high of 21,304.70 at the onset of the trading session, its highest level since 10 December 2013.
The CNX Nifty was down 18.05 points or 0.29% to 6,295.75. The index hit a low of 6,287.35 in intraday trade, its lowest level since 26 December 2013. The index hit a high of 6,344.05 in intraday trade, its highest level since 10 December 2013.
The market breadth, indicating the overall health of the market, was positive. On BSE, 1,280 shares gained and 1,120 shares fell. A total of 148 shares were unchanged.
M&M (down 1.18%), Cipla (down 0.98%) and ONGC (down 0.99%) edged lower from the Sensex pack.
Shares of two-wheeler majors -- Bajaj Auto and Hero MotoCorp-- edged lower. Bajaj Auto was of 1.51%. Hero MotoCorp was off 1.23%.
TVS Motor Company surged 11.5% to Rs 76.70. The scrip hit 52-week high of Rs 81.40 in intraday trade. High volumes accompanied the rally in the counter. On BSE, so far 25.11 lakh shares changed hands in counter, compared with average daily volume of 3.3 lakh shares during the past one quarter.
Realty stocks edged lower. DLF (down 2.75%), D B Realty (down 1.15%), HDIL (down 0.09%) and Unitech down 0.64%) dropped.
IT stocks edged lower on profit booking after recent strong gains. Tech Mahindra fell 0.81% to Rs 1,846. The stock reversed direction after hitting 52-week high of Rs 1,875 in intraday trade.
Wipro lost 0.86% to Rs 550.60. The stock had hit 52-week high of Rs 558 in intraday trade on Friday, 27 December 2013.
Infosys shed 2.08% to Rs 3,488.15, with the stock extending intraday losses. The stock had reversed direction after hitting record high of Rs 3,575 in intraday trade.
HCL Technologies fell 0.54% to Rs 1242.55. The stock reversed direction after hitting record high of Rs 1,269 in intraday trade. The company after market hours on Friday, 27 December 2013, announced that Vineet Nayar, Director of the company since 2008, has decided to retire from the board in order to devote more time to his Foundation. HCL Technologies also announced on Friday, 27 December 2013, the appointment of Vineet Nayar as a Senior Advisor to HCL Technologies and HCL Corporation.
"Vineet has been a friend and a colleague for over two decades now. His bold ideas and passion for the organisation, has inspired many others to think and dream big. His contribution to HCL and the Board has been a benchmark for others to follow and we all are very proud of him. On behalf of the Board, I thank him for all that he has done and I look forward to his continued association with HCL as a Senior Advisor," said Shiv Nadar, Chief Strategy Officer and Chairman HCL Technologies.
"I am grateful to Shiv, Board Members and the employees of HCL Technologies, for giving me an opportunity to dream, learn, explore and experiment along with them. There are very few organisations where one could rise up the ranks and become the CEO and Vice Chairman. I applaud Shiv for creating such a culture at HCL and thank him for his mentorship, guidance and friendship over these years. As I pursue my dream, of creating a Million Smiles through Sampark Foundation, I carry with me goodwill, best wishes and lots of learning. I also hope to continue to add value to both HCL Technologies and HCL Corporation through my continued association. I wish all the HCLites, exciting and energized years' ahead," said Vineet Nayar Founder, Sampark Foundation.
As a Senior Advisor, Vineet will advise HCL Corporation on key strategic issues and also work with the board of HCL Technologies on initiatives such as driving a high performance culture amongst senior managers and new strategies for growth.
TCS rose 0.02%, with the stock reversing intraday losses.
In the foreign exchange market, the rupee edged lower against the dollar as signs of a quickening economic recovery in the United States boosted speculation the US Federal Reserve will keep reducing monthly debt purchases. The partially convertible rupee was hovering at 62.065, compared with its close of 61.85/86 on Friday, 27 December 2013.
In his foreword of the central bank's Financial Stability Report (FSR) - December 2013 released today, 30 December 2013, RBI Governor Raghuram Rajan said that the commencement of tapering by the US Federal Reserve will mean a repricing of certain assets with consequent volatility in the global financial markets and that a potential additional source of uncertainty for India is the coming general election. A stable new government would be positive for the economy. With confidence in the financial system still fragile, six years into the crisis, policy certainty is something investors look for in the current environment, Rajan said.
The RBI governor said that the outlook for the economy has improved, with export growth regaining momentum, but growth is still weak. The challenges of containing inflationary pressures limit what monetary policy can do, he said. It is imperative that long-delayed legislative reforms are pushed through, stalled infrastructure project clearances continue and fiscal consolidation remains on track, Rajaj said.
The current level of non-performing assets in the Indian banking system do not pose a systemic concern as the CRAR of the banking system is above the prescribed levels and many projects are just delayed, not unviable, Rajaj said. "But we cannot be complacent", he added.
The stress tests assume extreme conditions and tail events and show that the financial system in India is resilient to stresses at this point in time though continued vigilance is warranted, Rajaj said.
The Reserve Bank of India today, 30 December 2013, released the Financial Stability Report (FSR) - December 2013. The eighth in the series, the FSR - December 2013 is being released against the backdrop of a mild positive market reaction to the announcement of tapering in the US Federal Reserves' bond purchase programme from January 2014, the central bank said in a statement. The commencement of the taper should signal a calibrated return to normal liquidity and credit conditions in the global markets and also better pricing of risk, the RBI said. This will mean a repricing of certain assets with consequent volatility. Efforts during the past few months have been directed to make the Indian economy more resilient to the ultimate withdrawal of liquidity from the system and less reliant on unstable external capital for growth, the RBI said.
The US Federal Reserve has now laid to rest the uncertainty on timing of the exit and tapering in its bond purchase programme, which is set to begin from January 2014. However, financial market volatility will be conditioned by the pace of tapering going forward, RBI's FSR - December 2013 said. Realignment of global growth as well as high inflation differential between advanced economies (AEs) and Emerging Markets and Developing Economies (EMDEs) is a potential source of exchange rate volatility and may result in volatile cross-border flows with every repricing of risk, the report said. The delay in tapering allowed India to bring about adjustment in the current account deficit (CAD) and build buffers by replenishing its foreign exchange reserves. However, macro-economic adjustment is far from complete, with persistence of high inflation amidst growth slowdown, the report said. Fall in domestic savings and high fiscal deficit are other major concerns for India, the RBI report said.
Corporate performance continues to be weighed down by boom period expansions and excess capacities, amid shifting asset composition towards financial investments, the RBI report said.
House prices and outstanding loans for housing by housing finance companies have grown relatively faster during the last few years, the RBI report said.
Inadequate social security coverage in India against a backdrop of changing demographics will pose challenges for expanding the pension system given the fiscal constraints, the RBI said. The National Pension System (NPS) was created to serve Government employees and private sector workers.
The risks to the banking sector have further increased since the publication of the previous FSR in June this year. All major risk dimensions captured in the Banking Stability Indicator show increase in vulnerabilities in the banking sector. Failure of a major corporate or a major corporate group could trigger a contagion in the banking system due to exposures of a large number of banks to such corporates.
Asset quality continues to be a major concern for Scheduled Commercial Banks (SCBs). The Gross Non-performing Assets ratio of SCBs as well as their restructured standard advances ratio have increased. The total stressed advances ratio rose significantly to 10.2% of total advances as at end September 2013, from 9.2% of March 2013. Five sectors viz. Infrastructure, Iron & Steel, Textiles, Aviation and Mining together contribute 24% of total advances of SCBs, and account for around 53% of their total stressed advances.
Macro stress tests on credit risk suggest that if the adverse macroeconomic conditions persist, the credit quality of commercial banks could deteriorate further. However, under improved conditions, the present trend in credit quality may reverse during the second half of 2014-15, the RBI report said.
India stands committed to the implementation of the global regulatory reforms agenda and has made considerable progress on this front. Although firms and markets are beginning to adjust to the regulatory approach towards ending too-big-to-fail (TBTF), recent research indicates continued expectation of sovereign support to such institutions, the RBI said.
Due to the interconnectedness with banks, liquidity pressure is felt by the money market mutual funds (MMMFs) whenever redemption requirements of banks are large and simultaneous. Regulatory measures taken to reduce the degree of interconnectedness seem to have been successful in reducing the liquidity risk in the system, the RBI said.
India's domestic markets for interest rate derivatives have not taken off due to the absence of some of the basic building blocks. Efforts are on to address these issues, the RBI said.
Action to create central repositories for the banking sector, corporate bond market and insurance sector has been initiated. This move is expected to break the information asymmetry in those markets, the RBI said.
It has been observed that the equity prices of the companies in which the promoters had pledged significant portions of their shares, are relatively more volatile than the broader market during times of correction, the RBI said.
The FSR, published every six months, aims to create awareness about the vulnerabilities in the financial system, to inform about the resilience to stress of the financial institutions and to generally serve as a health check on the financial system. The report reflects the collective assessment of RBI's Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability.
The next major trigger for the market is Q3 December 2013 corporate earnings. The Q3 earnings season will begin around mid-January 2014 and continue till mid-February 2014. Investors and analysts will closely watch the management commentary that would accompany the result to see if there is any revision in their future earnings forecast of the company for the current year and/or the next year.
European stocks edged higher on Monday, 30 December 2013. Key benchmark indices in France, and UK rose 0.07% to 0.18%. Germany's DAX fell 0.01%.
Asian stocks edged higher on Monday, 30 December 2013, with Japan's Nikkei 225 Stock Average poised for its biggest annual gain since 1972, as the yen touched a five-year low versus the dollar. Key benchmark indices in Indonesia, Japan, Taiwan, South Korea and Singapore were up 0.18% to 1.04%.
China's Shanghai Composite fell 0.18%. Hong Kong's Hang Seng rose 0.01%. Chinese Premier Li Keqiang said China has the conditions to keep its economy and financial markets stable next year by deepening reform and further opening up, according to a statement posted on the central government website yesterday, 29 December 2013.
Trading in US index futures indicated that the Dow could advance 3 points at the opening bell on Monday, 30 December 2013. US stocks slipped on Friday on light trading after stocks reached record highs earlier last week.
Later Monday, investors are due to receive the November report on pending US home sales.
The US Federal Reserve said after a two-day monetary policy review on 18 December 2013 that it will cut its monthly bond purchases to $75 billion from $85 billion starting in January 2014 amid an improved outlook for the job market in the world's largest economy. The US central bank is poised to continue winding down its stimulus measures gradually over the next year.
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