17th June, 2013 : Comments by Amar Ambani, Head of Research, India Infoline (a well diversified financial services company)
The indices started the week with smart gains extending its upswing for the second consecutive trading session. Ahead of the Reserve Bank’s monetary policy, the market traded flat with a slight negative bias. However, the benchmark indices staged a strong come-back post the RBI policy meet.
In today’s top news, the Reserve Bank decided to keep key interest rates unchanged. RBI Governor D Subbarao stated that only a durable fall in inflation will open the space for policy easing.
According to Amar Ambani, Head of Research at IIFL, RBI had no choice but to maintain status quo on account of the 9% depreciation in the rupee since the beginning of May. “India has the second largest current account deficit in the world in absolute terms and faces the risk of further depreciation of its currency. It decided to view the impact of the fall in inflation and fallout of the government’s steps to reign in CAD. In any case, significant monetary transmission of the cumulative 75 basis point cut in 2013 are yet to take place. Going forward, RBI’s focus will be to reduce the liquidity deficit, which stands at over Rs. 1 lakh crore.”
Another dampener was the disappointing trade data. The trade deficit widened to $20.1bn in May as against $16.9bn the same period last year. Exports declined 1.1% to $24.51bn in May after four months of marginal growth. On the other hand, imports increased 7% to $44.65bn with bullion imports rising 89.7% to $8.3bn.
However, positive cues from Europe post lunch boosted sentiment and helped the benchmark indices end in the black.
The Sensex closed up 147 points at 19,325 while the Nifty closed at 5,850 up 42 points over Friday’s close. The BSE Small- and Mid-Cap indices ended marginally higher by 0.31% each.
The gainers pack was led by BHEL, M&M, Bharti Airtel, Bajaj Auto, Reliance Infrastructure, Axis Bank, Maruti, HCL Technologies, Sun Pharmaceutical and SBI while Ranbaxy, Hindalco, GAIL, NTPC, Sesa Goa, Jindal Steel, Dr Reddy’s Laboratories, Power Grid, NMDC and DLF lost out.
Among sectors, auto, capital goods, consumer durables, oil and gas, FMCG, healthCare and power gained.
The advance-decline ratio marginally favoured the bulls. On the Bombay Stock Exchange, 1,210 stocks advanced against 1,083 declines, while 139 stocks remained unchanged.
Volatility, as measured by India VIX, closed down 1% at 18.18. It hit a day’s high of 19.35 and low of 18.13.
Although headline and core WPI inflation continues to decline sharply and are at multi-year lows, the RBI had no choice but to maintain status quo on the Repo rate front, on account of the 9% depreciation in the Rupee since 1st of May.
The US Dollar has been strengthening, particularly against countries with high Current Account Deficits (CAD), on improving US economic data and fear of premature withdrawal of the bond buying programme by the Federal Reserve. India has the 2nd largest CAD in the world in absolute terms and faces the risk of further depreciation of its currency. The RBI would like to wait to see the impact of the depreciation on inflation and also action from the government to reign in the CAD. In any case, significant monetary transmission of the 75 basis points cuts in 2013 is yet to take place. The CRR has been left unchanged and the RBI’s focus will be to reduce the liquidity deficit, which stands at over Rs1 trillion.
While it is not clear if the Governor will cut rates in the next policy review, we expect an incremental 50-75 basis points Repo cut till March 2014. This is based on the likelihood of subdued global commodity prices, normal monsoons, deceleration in consumption momentum and some stability in the INR in the coming months.