After fears of a pullback in quantitative easing subsided, majority of the major global stock markets recovered during the week. The New York Federal Reserve Bank President has stated that the asset purchases would increase aggressively in the event of lower than expected recovery in the economy and labour markets. Japan (up 3.4%) was the biggest gainer during the week gone by. The markets there received a further boost from positive economic data signaling a steady pick-up in the Japanese economy. India (up 3.3%) and Hong Kong (up 2.7%) were the other indices leading the pack of gainers. The Indian markets ended the week on a strong gains backed by improving current account deficit and hike in gas prices announced by the government.
The US stock market ended marginally positive (up 0.8%) over the week. The European stock markets too regained lost ground. The stock markets in France & Germany were up by 2.2% each and the UK stock market ended 1.6% higher over the week. Majority of the Asian stock markets also ended the week in gains. However, concerns on squeeze in the banking system saw the China stock market declining by 4.5% for the week.
Now let us discuss some of the economic developments of the week gone by.
On the macro-economic front, India finally had some positive data to cheer about. As per data released by the Reserve Bank of India (RBI), the proportion of current account deficit to gross domestic product (GDP) moderated to 3.6% in March 2013 quarter. The improvement has come on the back of an increase in exports and marginal decline in imports.
To encourage the flow of investments in the oil & gas sector - in order to raise domestic production and reduce dependence on imports - the Government approved doubling of gas prices from the current US$ 4.2 per million metric British thermal units (mmbtu) to US$ 8.4 per mmbtu. The new prices will come into effect from April 1, 2014, and would be reviewed every three months. It will apply to all the gas producing companies uniformly including firms like Oil India Limited (OIL), Oil and Natural Gas Corporation Ltd. (ONGC) as well as private companies like Reliance Industries.
Now let us move to some news from the corporate world.
Mining major Coal India (CIL) has decided to prepay its Japanese loan of Rs 3-4 bn in the light of steep depreciation in rupee against the dollar. The company also has a World Bank loan of Rs 4-4.5 bn but the loans terms do not have provision for pre-payment. Reportedly, these loans were taken by CIL for development and modernization. In another development, (CIL) is planning to set up seven coal washeries with an estimated capacity of 16 m tonnes. Currently, the company has 17 washeries with an installed capacity of 35 m tonnes. The new washeries are part of the 12th Five Year Plan and will be developed on a public-private-partnership format at an investment of Rs 20 bn. The maintenance cost of the washeries will be incurred by CIL. The company has already signed agreement for two washeries and would sign for two more in the near future.
The fuel supply agreements (FSA) for coal that hit a deadblock showed positive development after disagreement with National Thermal Power Corporation (NTPC) has finally resolved. NTPC agreed to sign the fuel supply agreement (FSA) with CIL for 9,370 megawatt capacity plants. The FSA was inked after arriving at a consensus on coal quality. NTPC agreed to accept inferior quality coal (less than 3,100 kilo calories per kg) subject to limiting its incentives under the agreement. On the other hand, Coal India, assured independent quality checks at the point of loading of coal, which would start by September 30. According to the FSA guidelines, if CIL supplies more than the minimum assured quantity of 80% (65% domestic and 15 % import) to its client, the miner is provided with incentives on the additional supply. However, as per the revised FSA, NTPC would incentivize only 25% of the proportionate quantity.
With an aim to improve its non-performing assets (NPA) and reduce slippages State Bank of India (SBI), the country's largest public sector lender, has decided to take stringent actions against defaulting borrowers. SBI's bad loans rose by Rs 115 bn to Rs 512 billion as at the end of 31st March 2013. Therefore the banking major SBI has turned aggressive with respect to loan recovery. While the bank's field staff has been ordered to go after loan defaulters, the bank staff has been asked to take photographs of the properties during inspection and keep them in records. Further, the bank has decided to take physical possession of the assets to preserve their value and realize their true value through auctions. If the auction fails, the bank may consider acquiring some properties at the reserve price for its own use.
More on the banking front, non-banking financial company (NBFC) Mahindra Finance will not be contesting to secure a bank license from the Reserve Bank of India (RBI). The company has clarified that the current guidelines has an adverse impact on the economic and operational aspects of the business of large NBFCs. As per the company, the current guidelines do not allow an NBFC and a bank to co-exist for a reasonable period of time. Moreover, the company is also concerned with the Cash reserve ratio (CRR) and Statutory liquidity ratio (SLR) requirements to be fulfilled right from inception. Even Reliance Industries has decided not to set up a bank citing financial sector not being its core area of business. The company has also raised concerns over business risks and regulatory risks associated with the banking sector. However, other conglomerates such as the Tata Group and few NBFCs' namely, SREI Infra Finance, IDFC, Religare and Tourism Finance Corporation of India are still in the race to acquire banking license.
In a major crack-down on harmful impact of drugs, the health ministry of India has suspended two drugs containing Anagilin and Pioglitazone. Anagilin is a pain killer and Pioglitazone is prescribed for diabetes. The ban of Anagilin has come after 36 years since the drug was banned in the US in 1977. Studies indicate that higher intake of Anagilin can cause fall in white blood cells in the body. Pioglitazone was banned in France in 2011, as intake of the drug increased the risk of bladder cancer. However Pioglitazone continues to be sold in most other major markets, viz., US, UK, Japan and Canada. In India, Pioglitazone is sold by companies such as Cadila Healthcare and USV. The domestic drug industry is protesting suspension, as this would force lakhs of patients to opt for expensive alternatives. The move by the Indian government is expected to be challenged in courts.
The global stock markets made a smart recovery after attempts made by Fed to quell fears of a rapid pull-back in the quantitative easing. The Indian markets witnessed a steep jump at the end of the week on improving macroeconomic environment as current account deficit narrowed down in the March 2013 quarter. Even as volatility continues to mar global markets on uncertainty pertaining to the withdrawal of the quantitative easing, the Indian markets are placed on a relatively stronger footing.