The World This Week - September 16 - September 20, 2013
The World This Week
September 16 – September 20, 2013
Global markets cheered the U.S. Federal Reserve’s decision to postpone the reduction in its $85bn per
month bond buying program (QE3). For the Calendar year 2014 too, the Federal Reserve has cut down
both the inflation and the GDP growth forecasts. What the Fed is saying is that the recovery in U.S. is not
yet as strong as they were expecting it to be and they have decided not to put any tapering on board as
of now. Also we have the U.S. Budget talks happening in the 1st week of October. As we all know, U.S.
has a September ending fiscal year and there has to be a discussion on Debt Ceiling Enhancement in the
first two weeks of October. Looking at how the Republicans and Democrats stack up in both Houses of
Legislature there, it is likely that there is going to be some amount of delay and controversy as far as the
Debt Ceiling Limit is concerned. We believe that Federal Reserve has taken all those things into account
while arriving at this decision of keeping a status quo for now.
Fed’s announcement has proved to be a definite positive for the global Equity and Debt markets. We’ve
seen Emerging Market Equities, Currencies and Debt – all bouncing back across the Globe, after a
significant amount of selling that we saw in the last 3 months. It is also contingent on when the tapering
actually starts - it could either happen in December or January - but it is certain that the tapering will
start. We believe that the next few months will be lesser volatile as compared to what we’ve seen since
the beginning of May when the first time we heard about the tapering.
As far as Indian Macroeconomic events are concerned, we saw RBI announcing its Monetary Policy on
Friday the 20th of September. As expected, the Marginal Standing Facility (MSF) rate was cut down by 75
bps. Clearly what the new RBI Governor Mr. Raghuram Rajan has been trying to do there is reduce the
short term rates and some of these measures which were adopted earlier to defend the Rupee are
beginning to get unwind as stability comes back to the Rupee. We have seen the Rupee bouncing back
from 68.8 levels against the Dollar to 62 levels now - which is a good 10%-11% kind of an appreciation.
We have seen some kind of stability emerging on the Rupee side. Also, bond yields are started cooling
off. However, with the unexpected rise in Repo rate on Friday, we saw the the bond yields again moving
up by around 20 bps. We however believe that in the short term, the RBI would not really want to
increase it significantly from these levels and going forward, we would see some more cuts in the MSF
rates. This in turn would help banks in borrowing at a cheaper cost as far as the short term borrowing
rates are concerned.
Over all from a Macroeconomic perspective, we see more stability emerging now and believe that the
worst of crisis is out of the way. Although we are seeing the Rupee stabilize at an elevated level, the
sense that the Rupee is stabilizing will help calm down other asset markets like Equity and Debt. From an
Equity market perspective, we believe that now the worst is certainly behind us. We’ve seen high
volatility in the months of August and September in which the Nifty went down to 5285 on 28th August
and from there we’ve bounced back to 6000 levels. We believe that for long term investors, this market
provides an extremely attractive opportunity to gain entry into the markets.
Considering a worst case scenario too, we believe that we’ll end up with a GDP Growth Rate of around
4% and Fiscal Deficit of around 5.5% - 6% of the GDP. We’ve already assumed the worst case scenarios
and there is not much to lose from these levels. As we’ve also highlighted earlier, the only variable which
is keeping the markets so volatile is the Rupee and now that the Rupee has also gained a sense of
stability, going forward Equity markets should continue to do well. Hence, we reiterate our positive call
on Indian Equities, with a target of 22,400 for Sensex by the end of this fiscal year and believe that
investors can go out and aggressively build portfolios and invest from now.
Food inflation accelerated to a three-year high of 18.18 percent in August, government data
released on Monday showed, driving the benchmark Wholesale Price Index up by a stronger-than-
expected 6.1 percent.
India increased the import duty on gold jewellery to 15 % from 10 % on Tuesday, in a move aimed
more at protecting the domestic jewellery industry rather than stemming overseas purchases to
narrow its current account deficit.
RBI announced the Mid Quarter Monetary Policy on Friday and various policy actions undertaken
are as follows:
Repo Rate increased to 7.50%
Reverse repo increased to 6.50%
Margin Stabilization Facility (MSF) reduced to 9.5%%
CRR kept unchanged at 4%
SLR left unchanged at 23%
Greece is in a sixth year of recession, with unemployment at a record 27.9 percent. House prices
dropped almost 12 percent in the second quarter, according to the central bank.
Fed policy decisions influenced policymakers to cut their 2013 growth forecast to 2.0 percent to 2.3
percent from a June estimate of 2.3 percent to 2.6 percent, the biggest drop in the near-term
forecast in more than a year.
U.S. bank excess reserves deposited with the Federal Reserve have mushroomed from less than $2
billion before the financial crisis to $2.17 trillion today even as the Fed has flooded the financial
system with $2.8 trillion through its asset purchases over the past five years.
House prices in China climbed 8.3% in August on an annual basis, from 7.5% in July, while prices in
the country's three biggest cities - Beijing, Shanghai and Shenzen - jumped 18%.
Satadru Mitra Varun Goel Jharna Agarwal
Abbas Naheed Kinjal Mehta
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