Global markets have ended on a mixed note in the week gone by. The markets were weighed down by lowering of global growth forecast for this year to 2.8% vs 3.2% earlier in January by the World Bank. Also increasing concerns over geopolitical tension in Iraq leading to spike in oil prices further weakened sentiments.
Barring few Asian indices and Brazil markets, other markets have declined. Amongst Asian Markets; Japanese and Chinese markets have gained led by better than expected China economy data and Bank of Japan's encouraging comments on overseas growth and retention of its current monetary policy. China's factory output rose 8.8 % YoY in May, in line with market expectations. Indian markets and Singapore markets were leading the pack of losers this week in Asian Markets. US markets too shed its gains later this week to end in the red. The markets weakened on account of weak retail sales and poor weekly jobless claims data. US retail sales grew by 0.3% in May lower than an expectation of a 0.6% rise. As per the Labor Department; initial claims for state unemployment benefits climbed by 4,000 to 317,000 which was more than expected. The dollar also fell on worries that violence in Iraq would disrupt oil supplies. European markets ended in the red as effect of better than expected European industrial production data was offset by fears of turmoil in Iraq and weak US data.
Coming to the domestic markets; the Sensex has declined by 0.7% after touching new life time high this week. The euphoria after stupendous win of BJP seemed to be settling in as profit booking was seen in majority of the sectors. A strong Index of Industrial production (IIP) growth in April (up 3.4%) and lower than expected inflation growth (core inflation up 7.72% in May) was overshadowed by the World Bank's weak forecast for Indian economy and concerns in Iraq.
Majority of the sectoral indices in the Indian markets ended the week in a negative territory. Barring IT (up 5.9%), Pharma (up 4.1%) and Auto (up 0.1%); all other indices ended in the red. Realty (down 6.3%), and oil and gas (down 5.2%) witnessed the highest selling during the week.
BSE indices during the week
Now let us discuss some of the economic developments of the week gone by.
In an unprecedented move the government plans to raise the urea prices by as much as 10% in order to cut the subsidy costs and manage its finances well. If implemented this would be a first major price hike in 4 years. It may be noted that urea prices are controlled by the government so that the fertilizer remains affordable to farmers. However, this has led to excessive use of urea and disturbed the soil composition.
Also, urea being a politically sensitive subject, in the past, many governments refused to tinker with its price band. As such, the decision to raise the prices now by as much as 10% has come in as a major surprise. Nonetheless, it highlights government's willingness to keep its finances under control. It may be noted that fertilizer subsidy costs have increased by almost 4 times in the last decade as the UPA government chose not to raise the prices. Fearing that the move may antagonize rural vote bank the government absorbed majority of the subsidy burden. This created a huge fiscal mess. While the decision to raise urea prices now appears sensible it would be interesting to see how the farming community reacts to the same.
In a forecast that could pose a cause of concern for India, the ministry of earth sciences has forecasted that the rainfall for the June September period could be below normal. As per the ministry, the rainfall is expected to be 93% of the long period average (LPA) this season. A deficient monsoon would raise food inflation. On the other hand poor crop production due to deficiency in rainfall could impact the farm income as well. This may impact the rural disposable income and thus their standard of living.
The main reason for poor monsoon is due to a likelihood of El - Nino, a weather disturbance phenomenon, which disrupts rainfall patterns. However, it seems that the government is ready to cope with this situation. As an example, ministries are considering rescheduling crop loans, providing interest sub-vention to farmers etc. Proving seed subsidy is also being considered. While these steps may benefit the farmers in the near term if the food inflation becomes difficult to control India's growth could slow down.
India's trade deficit widened during the month of May to US$ 11.2 bn from about US$ 10.0 bn in the previous month. This is despite the fact that exports witnessed the strongest ever growth in the last six months. For the month of May exports stood at US$ 28 bn while imports stood at US$ 39.3 bn. Trade deficit is the difference between exports and imports. Hence, rising exports should effectively reduce the deficit. But it has happened otherwise as imports did not fall by much. A rising trade deficit could be a cause of worry as it may pressurize the Rupee. And this may stoke fuel inflation. Hence, it is important that deficit figures do not widen and government comes out with appropriate policies that boost exports thereby increasing their competitiveness.
The RBI has no plans to increase the foreign investment limit in government bonds. Presently, the foreign institutional investors (FIIs) limit for investment in government bonds is US$30 bn; segregated as US$20 bn for all and US$10 bn for specific investors like foreign banks etc. It appears that the US$ 20 bn limit has been fully exhausted. There were expectations that the government will raise the limit to attract more investors. However, the speculation has been put to rest with RBI maintaining a status quo on the limit. While increasing the limit would have attracted more foreign funds and led to appreciation in Rupee, RBI is cognizant that such a step could also backfire if foreign investors suddenly decide to withdraw the same money in the future amidst any uncertainty. This may put unnecessary pressure on Rupee and make our currency extremely volatile. Hence, the decision to limit foreign investor participation in the bond market was a step in the right direction.
The industrial growth for April has rebounded and consumer inflation has eased for May as per the data released by India's statistics office. IIP has risen by 3.4% in April, the highest since March 2013. In past two months i.e. February and March; the index had recorded a decline. The industrial production growth was aided by an 11.9% rise in electricity generation; mining output was up 1.2% from a year ago in April while manufacturing rose 2.6%. Capital goods production was up 15.7%, suggesting a revival in investment activity. However, growth in capital goods was on a weak base of 0.3% decline in April 2013. Coming to inflation; core inflation fell to 7.72% in May from 7.8% in April. Food inflation dropped from 9.83% to 9.56% over this period. This was despite concerns of bad monsoon which is likely to raise food prices.
Now let us move on to some more developments in India Inc.
As per a leading financial daily, Steel Authority of India Ltd (SAIL) is close to completing a Rs 120 bn expansion plan (from 2 million tonnes to 4.5 million tonnes per annum) at its steel plant at Rourkela, Odhisha. Further, the firm is planning to more than double the capacity at the facility in the next phase, expanding it to 10.8 million tonnes per annum (MTPA). By 2025, the company aims to attain a capacity of 50 MT. As per the management, some of the schemes under this expansion plan, such as 3 MTPA hot strip mill and the beneficiation and pelletisation plant have already been tendered out.
India's third largest telecom firm Idea Cellular, has successfully completed raising funds via a Qualified Institutional Placement (QIP). The QIP was of an amount of Rs 30 bn at a floor price of Rs 136.98 per share. The issue received significant interest from financial institutions and was oversubscribed about three times. The company has raised the funds in anticipation of telecom auctions later this year. The company does not need the funds to pare down its debt as it generates sufficient cash from operations to service the same.
Gas Authority of India Ltd (GAIL) is offering liquefied natural gas (LNG) procured from US at USD$ 12-13 per million British thermal units (BTU). The company has entered into a 20-year agreement to buy 3.5 m tonnes of LNG a year from Cheniere's Sabine Pass terminal. GAIL's internal requirement stands at 1 million tons annually and the balance the company proposes to re-sell it to Indian customers at prices indexed to the US benchmark of Henry Hub prices. Currently India buys LNG from Qatar at oil-indexed prices of USD$ 13.8. The natural gas produced in India is currently priced at USD$ 4.2and is expected to double after it is revised shortly. As per GAIL, the supplies are expected to commence from FY18.
According to a leading business daily; Oil marketing firms are in bound to see an improved performance in FY15. This is due to the appreciation of the rupee as well as the stability in international crude prices. In addition to this, the partial but steady deregulation of diesel prices on a monthly basis has reduced the under recoveries to a large extent. The bottomline of the downstream companies is expected to increase by Rs 33-36 bn in FY15. The under recoveries had increased the short term working capital needs of these firms and had resulted in huge interest payments. This can now be expected to reduce going forward.
The Government is likely to pursue reforms in the coal sector by allowing private firms to mine and sell the coal. It is important to note here many companies are forced to import the fuel despite the huge reserves of coal in India. While India has an estimated coal reserves of over 250 billion tonnes, Coal India that produces around 85% of the fuel mined in the country, is not able to exploit the same due to capacity and technical constraints. Currently, the private firms are allowed to mine coal only for captive use and are barred from selling the same in the open market.
As per a leading business daily, the car sales have witnessed positive growth for the month of May 2014. This is the first time in this year that car sales have witnessed positive growth. The growth reported for May 2014 is 3.08%. The earlier months had witnessed decline in automobile sales. Reportedly, the automakers are now looking forward to make new launches ahead of festive season. Further, this growth is largely on expectations of better growth of the economy as the new government has taken the charge. Majority of the car companies, including Maruti Suzuki, Hyundai and Honda Cars, have all notched up their best performance during May 2014. Maruti Suzuki posted growth of 12.3% YoY in the domestic sales for the month of May. While, the current data certainly indicates encouraging picture we should still wait and see what steps the government takes to encourage higher demand of automobiles.
Infosys Ltd has appointed former SAP chief technology officer Vishal Sikka as the first outsider CEO of the company. As per a company statement, Dr Sikka will be inducted on Infosys board on June 14 and will take over as the CEO and MD from current chief SD Shibulal on August 1, 2014. This puts to rest uncertainty and speculation regarding the leadership at country's one of the top IT companies. It is to be noted that the company has been receiving some bad press lately because of the exits of several high-ranking executives. In a separate development, the company's founder Mr. Narayana Murthy will step down as executive chairman on June 14 2014. Mr Murthy had returned from retirement in June 2013 to lead the company.
In the coming week; the conflict in Iraq and its impact on oil prices will decide the course of the markets. The domestic markets are likely to consolidate after reaching the life time highs. The concerns over a delayed or bad monsoon may also impact markets. We recommend investors to tread cautiously while investing and avoid stocks which have run ahead of their fundamentals.