Indian Indices Trade Marginally Lower

Fri, 19 Aug 11:30 am

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After opening the day marginally higher, the Indian indices registered losses and went on to trade in the red. Sectoral indices are trading on a mixed note with stocks from the telecom and energy sector witnessing maximum selling pressure. Consumer durables stocks are trading in the green.

The BSE Sensex is trading down 17 points (down 0.1%) and the NSE Nifty is trading down 3 points (down 0.01%). The BSE Mid Cap index is trading up by 0.6%, while the BSE Small Cap index is trading up by 0.5%. The rupee is trading at 66.92 to the US$.

As per an article in the Economic Times, the government is going to disburse Rs 346 billion to its employees in August salary as arrears because of implementation of the 7^th pay panel recommendations. This comes as the government has last month announced that it will pay its employees arrears arising out of implementation of the 7^th Pay Commission award at one go in August.

One must note that the government has already notified the 2.57-time hike in basic salary for 1 crore government employees and pensioners as per the 7th Pay Commission recommendations. The pay hike has been made effective January 1, 2016.

As an effect of this, an aggregate outflow of Rs 1,020 billion would flow from the government's kitty to 10 million central government employees and pensioners in the current fiscal year. Furthermore, the increase will take place retrospectively from January 2016.

The wage hike is expected to deliver a potential boost to the consumer economy. Not only that, but the recommendation will have a trickledown effect across various sectors too.

Apart from the above, there are many implications that the 7^th Pay Commission would have on the Indian economy.

However, the broader question that we have is how long will this momentum last? Will the economic stimulus help improve GDP growth over the long-term?

We believe that the development will reap short-term benefits. However, the same could not be said for the long-term. This, in our view, is because the private sector is typically a better and more efficient user of capital than the government. As a result, the momentum led by the 7th Pay Commission may be short-lived. The quality of demand would have been better if it were a result of genuine job creation and an actual rise in productivity. One of the recent editions of The 5 Minute WrapUp titled 'Will Babu Culture Be the Downfall of Sarkari Companies?' explains how public sector has paid the price of being inefficient for too long.

Moving on to the news from commodity space... Crude oil witnessed buying interest this week. The uptrend was seen on the back of higher demand in the US and possibility of an accord by the OPEC on output freeze.

The commodity surged on comments from the Saudi oil minister about potential action to stabilize prices. Further, the forecasts by International Energy Agency (IEA) that crude oil markets would rebalance in the next few months aided the rally in crude oil.

Recently Saudi energy minister Khalid al-Falih lent more credibility to the idea of controlling the downtrend on oil prices. He stated that the OPEC might consider taking action if oil prices remained low.

Along with the above announcement, the IEA stated that the world will consume less oil next year than previously thought. It estimated global oil demand growth to slow from 1.4 millions of barrels a day in 2016 to 1.2 million barrels a day in 2017. This was noted 100,000 barrels below its previous forecast.

At the time of writing, crude oil was trading at Rs 3,305 per barrel, up by around 0.9%. Do read what Richa Agarwal, research analyst at Equitymaster, has to say on the future prospects of crude oil prices.

To keep a regular tab on the movements in crude oil prices, you can read weekly market commentary from the Daily Profit Hunter team. Their weekly commentary tracks the developments in the global economy as well as stock, currency and commodity markets.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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