RBI injects liquidity via rate cut

Sat, 10 Mar RoundUp

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The world stock markets with the exception of Japan closed the week on a negative note. The US stock markets were down 0.4% during the week. Worries that successful completion of Greece bond swap would trigger insurance payments by banks and financial institutions that sold credit default swaps (CDS) overweighed markets. However, the employment data showed signs of job creation and economic recovery in the US. Overall 227,000 jobs were added in the month of February with the unemployment rate being 8.3%.

The Indian stock markets were down by 0.8% after witnessing high volatility during the week. Markets see-sawed on the repercussions of key events like election results and Greece rescue plan that culminated during the week. Further, in an unexpected move, at least in terms of quantum, the Reserve Bank Of India (RBI) cut the Cash Reserve Ratio (CRR) by 75 bps on Friday. The move will inject Rs 480 bn into the system. Unexpected rate cut is expected to drive the markets next week. Further, with the Union Budget scheduled to be announced on March 16 next week's session is expected to be equally volatile.

Amongst the other world markets, Japan was the only one to close in the green. France was down 0.4% while Hong Kong was down 2.2% during the week.

Source: Yahoo Finance

While the defensives like consumer durables, FMCG and pharma closed the week with modest gains metal and Oil and gas stocks were the biggest losers. Consumer durable was the biggest gainer (up 1.8%) during the week followed by Auto (1.6%). However, metals pack was down 3.9% during the week.

Source: BSE

Let us now take a look at key developments during the week. In an unexpected move RBI cut the CRR by 75 bps on Friday. While rate cut was expected in the monetary policy due on Thursday the quantum and the timing came in as a huge surprise. The revised CRR now stands at 4.75%. The move is expected to inject Rs 480 bn into the system thereby easing liquidity woes to a certain extent. Rate sensitive's like banks, real estate, construction and autos are likely to react positively to this event in next week's trade.

The textile industry has come up with its budget wish list and on top of that list is the demand for continuation of the technology upgradation fund scheme, known popularly as the TUFS. The industry has argued that since the scheme is crucial to all the inter connecting sectors such as spinning, weaving, knitting, processing and garmenting, it should be in place during the entire 12th five year plan. Besides this, the sector has also made other demands like the income of seed companies to be treated as agriculture income and the withdrawal of mandatory 10% excise duty on branded garments.

Now let us take a look at key corporate events during the week. Public sector lender IDBI Bank is planning to raise an amount of up to Rs 52.9 bn. This would be done through various means, including share sale to government and Life Insurance Corporation of India (LIC). The Tier 1 bonds held by the Government of India in the bank will be converted into preferential equity shares. The bank's board has fixed the issue price of preferential shares at Rs 112.99 per share. It will issue 188.5 m equity shares of face value Rs 10 each at this fixed price of Rs 112.99 per share; the aggregate amount will be Rs 21.3 bn. Also, IDBI would issue up to 221.2 m shares at a price of Rs 112.99 per share to the government, which will amount to Rs 25 bn. In addition, the bank would issue up to 58.6 m equity shares at the same price of Rs 112.99 per share to LIC. This will aggregate to about Rs 6.6 bn.

Compressed natural gas (CNG) prices for vehicles in Delhi have been raised by 5%. Oil marketing firms such as Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) also plan to raise petrol rates in a few days post state election results and on account of a sharp increase in global crude prices. The quantum of increase in petrol prices could be around Rs 5 per litre. Indraprastha Gas Ltd. (IGL), the sole supplier of CNG in Delhi and the neighboring National Capital Region (NCR) raised gas prices by Rs 1.70/kg in Delhi and Rs 1.90 per kg in neighboring areas such as Noida, Greater Noida and Ghaziabad. Prices were hiked on account of a declining domestic supply and costly imports. This is the second similar increase in barely two months. According to IGL's estimates the running cost per km will increase by 5 paisa for autos, 9 paisa for cars and 48 paisa for buses.

Tata Steel and Steel Authority of India (SAIL) have increased prices of steel products. Tata Steel has increased prices of its long products by about Rs 1,000 per metric tonne. SAIL on the other hand has increased prices of long products by Rs 500-1,000 a tonne. This is the second such hike in maximum recommended retail price (MRRP) in the past three months. Earlier, the company had increased prices in October 2011, after a long gap of around 10 months. Both the companies have citied an increase in demand for long products as the reason for hike in prices.

Titan Industries wants to expand its Fastrack brand to other lifestyle youth segments such as bicycles, helmets, shoes and apparel. The company derives 64% share of sales from branded jewellery retailed through 'Tanishq' brand and the rest from watches and eyewear segments through 'Titan' and 'Fastrack' brands. The company wants to diversify its Fastrack brand to categories, having a huge presence of the unorganized market, where its design advantage can be leveraged. Titan will do the design and marketing in-house and outsource manufacturing. The company has plans of sourcing helmets from China and launching in the country in FY13. In order to reduce dependence on parent brand 'Titan', the company aims to grow the brand value of Fastrack to Rs 30 bn in the next five years.

Movers and shakers during the week

Company	2-Mar-12	9-Mar-12	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Gujarat NRE Coke	22	25	13.0%	58/15
CESC Ltd	267	291	9.0%	353/189
Max (I) Ltd	163	175	7.1%	213/141
Yes Bank	341	365	7.1%	370/236
Piramal Healthcare	454	483	6.4%	485/340
Top losers during the week (BSE-A Group)
Adani Enterprises	369	318	-13.8%	760/266
Container Corp	1,015	890	-12.4%	1298/812
Sterling Biotech	13	11	-12.3%	102/11
Pantaloon	184	163	-11.7%	347/128
Hindalco	152	135	-11.2%	224/114

Source: Equitymaster
We will now discuss the other important corporate/economic events that took place over the week. In order to ensure adequate domestic supplies to the textile industry the government banned cotton exports during the week. The ban came after exporters shipped 9 m bales over the last six months, well ahead of the government forecast. Fearing that increasing exports would result in shortage in domestic markets government imposed a ban. However, agricultural minister, Sharad Pawar has recommended lifting the ban as production is well above estimates and continuing with the ban would hurt the cotton producers.

Rising imports and declining exports have prompted the government to revise its trade deficit target for the year. Exports increased 4.3% to US$ 24.6 bn while imports increased 20.6% to US$ 39.8 bn in February resulting in a trade deficit of US$ 15.2 bn. As a result, the trade deficit figure for the fiscal ending March has been revised to US$ 175-180 bn from an earlier estimate of US$ 160 bn. Widening trade deficit is likely to put further pressure on the rupee which had witnessed considerable erosion in 2011.

Considering the unexpected rate cut and the upcoming budget announcement it would be interesting to see how markets shape up during the next week's trade.