2. Equity View:
The markets continued to see a positive momentum which has been the case for last several weeks. FII’s continued
to invest more in Indian equity markets, taking the total investment to around Rs.65,000 crores since the beginning
of the calendar year. In the month of August itself, we have seen inflows of more than Rs.5,000 crores coming in.
We’ve seen a significant amount of positive momentum in US and European markets, and even in certain emerging
markets like Honkong and India. Of course we have seen a significant movement even in Gold and Crude Oil. The
markets have been moving in expectation of a possible QE3 announcement from US Fed. There’s a big meeting on
12th and 13th September in Jackson Hole. Traditionally, that is a place where US Fed has announced previous
Quantitative easing measures. This time too, the markets continue to expect that some kind of further monetary
easing action would be delivered by the US Central Bank. This would be the last window for a further stimulus
measure in US, because the US goes into election mode in November and any efforts to increase growth post
September would not really have a effect by the time elections happen. So clearly this would be the last source
and the markets continue to expect some kind of positive result from this meeting.
In Europe there again continues to be a lot of debate about what the next step for ECB is going to be. The Spanish
and Italian bond yields have significantly corrected in the last one month on the back of expectation that ECB is
going to cap bond yields both in Spain and Italy. In the last couple of months the increase in Spanish bond yields
was the biggest negative due to which markets were extremely concerned. If some kind of a cap on bond yields is
announced or if there is a range which ECB decides to declare for bond yields for the PIIGS countries, the markets
are going to take it as extremely positive step, based on which we would expect the ‘Risk-on’ rally to continue.
Back in India, we have seen a lot of talk about further reform measures from the government. There has been
some movement in the coal and the power space. There’s a lot of talk about pricing of coal. What has actually
happened is that coal prices have increased disproportionately across the world. The per-unit manufacturing cost
of power is actually a function of how the coal prices play out in the global markets. As the coal prices have
increased the cost of producing every unit of power has increased. Whereas the rate at which it gets sold to
various end users has been frozen because of which a lot of private power producers have been facing issues in
terms of lack of profitability. Tata Power’s Mundra Project is a classic example.
Now, a new agreement would be signed between Coal India and various Power generating Companies in which
Coal India is going to import the required coal for all power producers and pool it with the domestic coal. So
basically what they will do is, in various proportions that have been proposed, either 70%, 80% or 90% of the coal
would be Indian and remaining would be imported. And the price would be an average of the Indian coal and
foreign coal, because of which the average cost of coal being delivered to various power plants would increase by
15 – 20 paisa per unit. And that proportionate increase would be passed on to the end consumers by various
states. We’ve already seen almost 15 states carrying out increase in power tariffs in the last 4 months. And
probably this will soon get covered across the country.
This is a small but positive step towards reforms in the power space and we believe that by going forward we
might see further action in terms of restructuring of state electricity board debt. As we all know power sector is the
biggest infrastructure sector in India and lot of projects with the capex of almost Rs. 1 lac crore have been at
various stages of implementation and execution giving concerns about their viability. If this whole coal issue gets
sorted out we might see some kind of positive traction coming in power space.
3. In terms of data points the markets continue to look at how the monsoon pans out. The monsoon rains have been
extremely strong in the last couple of weeks and the overall monsoon deficiency on a pan India level is down to
12%. From the news that are coming in, the North West part of the country has received very heavy rainfall
because of which the sowing activity and the cultivated area in that part of the country should be more or less
across the 10 year average. Hence, a large part of concern about a drought like situation in India and that affecting
rural demand should get addressed. We also believe that there’s a lot of talk about slowdown in rural consumption
which will prove to be unfounded if the monsoon continues along expected lines.
News:
DOMESTIC MACRO:
India's annual consumer price inflation slowed slightly in July to 9.86% lower than 10.02% in June, helped
by a drop in petrol prices at the pump, government data showed on Tuesday, but a drought in parts of
the country pushed food prices higher.
India's monsoon rains were 2% below average in the week to August 22, the weather office said on
Thursday, while rainfall revived in rice, cane and oilseeds growing areas of one of the world's leading
food consumers and producers.
The Reserve Bank of India (RBI) said on Thursday that fighting inflation remained the cornerstone of its
monetary policy, and urged the government to cut expenditure, indicating it was unlikely to act soon to
ease rates despite slowing growth.
As of August 10, deposits with banks since March-end increased 2.8% to 62.8 trillion rupees, while credit
growth was muted at 0.4% to 47.2 trillion rupees, data from the Reserve Bank of India
GLOBAL MACRO
EURO
Angela Merkel and Francois Hollande presented a united front towards Greece on Thursday, telling
Athens it should not expect leeway on its bailout agreement unless it sticks to tough reform targets.
Italian Prime Minister Mario Monti said on Sunday the end of the economic crisis in his country was in
sight and that the euro zone must not let the single currency become a source of friction between the
north and south in the bloc.
US
Initial claims for state unemployment benefits rose 4,000 to a seasonally adjusted 372,000
U.S. "flash" manufacturing Purchasing Managers Index edged up to 51.9 in August from 51.4 in July. A
reading above 50 indicates expansion.
China
The HSBC Flash China manufacturing purchasing managers index (PMI) - a preliminary read-out that
provides an early peek at data for August - fell to 47.8 this month, its lowest level since November and
well down from July's final figure of 49.3.
China can afford to deliver a fiscal stimulus for its sagging economy, but would risk making bad
investments, ratings agency Standard & Poor's said on Wednesday as Chinese media fuelled speculation
that a fresh spending boost was on the way.
4. Satadru Mitra Varun Goel Jharna Agarwal
Abbas Naheed Kinjal Mehta
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