2. Equity View:
Last Tuesday, RBI cut the repo rate by 50 basis points, signaling a change in its tight monetary policy stance. Hence, the repo
rate is at 8.0% (earlier it was 8.5%) and simultaneously reverse repo rate is at 7% down from 7.5%. RBI governor Duvvuri
Subbarao has also cautioned against expectations of any immediate rate cut unless inflation expectation cools down
significantly. From a broader market view, this rate cut is definitely positive as it reduces the cost of capital for most
companies. it will also provide momentum to growth. Interest rate sensitive sectors like Banks, Infrastructure and Automobiles
should benefit the most. Banks should see a higher credit growth than last year, asset quality should improve and bond
portfolios would rally. Apart from tier I private sector banks, even large cap public sector banks are expected to do well.
Several banks have already announced a cut in their base rate. Many private sector banks like ICICI, Axis and Public sector
banks like SBI have already cut the base rates by 25 basis points.
Last week, the markets closed flattish (down 1%) and on Friday a freak trade was recorded in Nifty. In this trade almost 35 lakh
lots of Nifty futures were sold at a 7% discount to the market price as a result of which market fell very sharply but recovered
towards the day’s end. We had the results of HDFC bank and RIL last week. HDFC Bank results were in line with market
expectations. RIL posted a 21% decline in its net profit at Rs 4,236crs for the fourth quarter ended March 31, 2012. The oil
major had a net profit of Rs 5,376crs in the same period last fiscal. The refining margin came in at $8.6 per barrel which was
slightly higher than market expectations. The EBIT margins were also slightly higher than market expectations. Revenues from
oil and gas fell 36.5%, with natural gas production from KG-D6 falling 23.5% y-o-y and crude oil production falling 37.9% y-o-y.
RIL reported a further drop in natural gas production at its eastern offshore KG-D6 block to about 34 million standard cubic
meters per day. We believe the next year’s production numbers to be lower from these levels.
US earnings season is progressing well, more than 80% of S&P 500 companies have surprised on the positive. This week too we
have quite a few companies declaring their results which could lead to a market rally on the back of positive expectations. This
week, the most important event in the US will be the policy meeting of US central bank’s FOMC (Federal Open Market
Committee). The markets will look for any sign of Quantitative Easing 3(quantitative easing) which is being speculated to
commence for almost a year now. Any news on this will give a boost to risk on trade which we are seeing from beginning of CY
2012.
In Europe, Spanish yields moved up to more than 6% last week after a disappointing debt auction. ECB has already
commenced its bond market buying program and it remains to see how this picture pans out. We would highlight that the
uncertainty in Europe still remains one of the biggest issues for the equity market outlook across the world.
Long Term Debt Outlook:
After the 50 basis point cut by RBI, most of the debt funds and bonds have appreciated fairly. The prices of these long term
debt funds and bonds are expected to remain static for the next few months as it would be difficult to gauge RBI’s real intent
on further rate cuts. Unless the crude price comes down significantly, bringing the inflation lower, we would not see a rate cut
in the near term.
We are expecting a cumulative rate cut of about 1-1.5% in CY 2012, of which 0.5% has happened in last week itself and
another 1% is expected in the coming year but we may see yields stagnant for the next 6 months.
Investors who have invested in long term debt for gains purely through capital appreciation and with a time horizon of less
than a year, should book profits now. But, if the time horizon is more than 1-1.5 years, the investor can stay invested and
benefit in form of appreciation from further rate cuts.
After the recent rate cut, long term yields in Government securities have come down immediately, but Corporate credit is still
costly and many AA bonds are trading at higher yields. It is a good time to invest into these bonds as the yields of these bonds
are expected to follow the downward trend as seen in the G-Secs.
3. Indian Fiscal Deficit:
Unlike the western countries, Indian Fiscal deficit is fully funded domestically. Despite all worries about the macro-economic
instability due to the fiscal deficit, our view is that as long as India remains a high growth & high savings economy, it would not
lead to any major problems.
If the deficit continues to remain high, it would lead to current account deficit problems too which might push the rupee
down. Moreover, if imports remain relatively price inelastic, the Government would have to spend more on the imports and
governments subsidies would balloon as the crude oil prices will go up in rupee terms. But, when this is tested out with real
numbers, the sensitivity of such event happening is not high.
News:
DOMESTIC MACRO:
The wholesale price index (WPI), India's main inflation indicator, rose an annual 6.89% in March, higher than the
6.70% rise estimated by analysts, as manufacturing inflation eased even as food inflation shot up. But it was still
below February's 6.95% reading.
The Reserve Bank of India (RBI) cut rates on Tuesday by an unexpectedly sharp 50 basis points to boost the sagging
economy, but warned there was limited scope for more cuts, with inflation likely to remain elevated and growth on
track to pick up, albeit modestly.
Indian consumer prices rose 9.47% in the year to March, faster than the previous month's reading of 8.83%,
government data showed on Wednesday.
Indian banks' deposits grew 3.2% in the two weeks to April 6, while advances grew at a slower 1.8%, data from the
Reserve Bank of India showed on Wednesday.
GLOBAL MACRO
Euro:
France and Spain sold all the bonds they wanted at auction on Thursday, though for Spain the cost was rising yields,
indicating growing concerns the government will not be able to tame its deficit.
As the advanced and emerging countries agreed to double the firepower of the International Monetary Fund to help
contain Europe's debt crisis, the IMF's governing panel said the 17-nation euro area must make more cuts to
government debt burdens, push bold economic reforms and stabilize financial systems.
US:
Initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 386,000 suggesting that job
growth in April will not improve much after March's disappointing performance.
For the first quarter industrial production rose at an annual rate of 5.4%, with manufacturing advancing at a 10.4%
pace - the largest gain since the second quarter of 2010.
China:
China bagged foreign direct investment inflow of $29.8 bn a record-setting pace in the first three months of 2012, but
an easing in its monthly momentum and a difficult trade outlook will keep monetary policy poised to compensate for
any dip in capital inflows.
4. Satadru Mitra Varun Goel Jharna Agarwal
Palak Nanjani Abbas Naheed Kanika Khorana
Disclaimer
The information and views presented here are prepared by Karvy Private Wealth (a division of Karvy Stock Broking
Limited) or other Karvy Group companies. The information contained herein is based on our analysis and upon sources
that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for
personal information and we are not responsible for any loss incurred based upon it.
The investments discussed or recommended here may not be suitable for all investors. Investors must make their own
investment decisions based on their specific investment objectives and financial position and using such independent
advice, as they believe necessary. While acting upon any information or analysis mentioned here, investors may please
note that neither Karvy nor any person connected with any associated companies of Karvy accepts any liability arising
from the use of this information and views mentioned here.
The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-
mentioned companies from time to time. Every employee of Karvy and its associated companies are required to disclose
their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis
and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this
recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted
to place orders only through Karvy Stock Broking Ltd.
The information given in this document on tax are for guidance only, and should not be construed as tax advice. Investors
are advised to consult their respective tax advisers to understand the specific tax incidence applicable to them. We also
expect significant changes in the tax laws once the new Direct Tax Code is in force – this could change the applicability and
incidence of tax on investments
Karvy Private Wealth (A division of Karvy Stock Broking Limited) operates from within India and is subject to Indian
regulations.
Karvy Stock Broking Ltd. is a SEBI registered stock broker, depository participant having its offices at:
702, Hallmark Business plaza, Sant Dnyaneshwar Marg, Bandra (East), off Bandra Kurla Complex, Mumbai 400 051 .
(Registered office Address: Karvy Stock Broking Limited, “KARVY HOUSE”, 46, Avenue 4, Street No.1, Banjara Hills,
Hyderabad 500 034)
SEBI registration No’s:”NSE(CM):INB230770138, NSE(F&O): INF230770138, BSE: INB010770130, BSE(F&O):
INF010770131,NCDEX(00236, NSE(CDS):INE230770138, NSDL – SEBI Registration No: IN-DP-NSDL-247-2005, CSDL-SEBI
Registration No:IN-DP-CSDL-305-2005, PMS Registration No.: INP000001512”
