Rupee volatility haunts markets

Sat, 31 Aug RoundUp

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A possible US air strike against Syria for an alleged chemical attack on its own people caused a sharp reaction in financial markets. Global stock markets corrected. Oil and gold prices spiked before the mood calmed down. Syria's unsettling situation compounded nervousness over a possible tapering of the US Fed's QE program, which could come as early as 18 September. The US annual rate of growth, initially seen to be 1.7%, was revised upward. This was due to surprisingly strong export growth, which signaled increasing demand for US produced goods and services, a sign of a healthier global economy. US' second-quarter gross domestic product growth was revised up to 2.5%, and weekly jobless claims dipped, but other data showed a possible slowing in the recent pace of economic recovery. Business investment and the housing sector's strength contributed to economic growth.

Europe showed more signs of economic growth this week. Economic confidence in the eurozone rose to a two-year high in August, with broad-based improvement. Eurozone economic confidence rose, German business confidence improved and the United Kingdom had several positive economic reports.

Japan also reported strong economic data. Japan's consumer prices rose in July at the fastest pace in more than four and a half years. The year-on-year consumer price index rose 0.7%. However, stagnant wage growth means that households could face a growing financial strain. Japan's jobless rate fell to 3.8% in July from 3.9% in June.

For the week, US stocks fell broadly, but European and Asian benchmarks had mixed results. Among global stock markets, the German stock market posted the largest fall (down by 3.7%) while the Chinese stock market posted the highest gain (up 2%).

However back home, things were very different. India's GDP for the first quarter of FY14 grew by 4.4% against 4.8% in the fourth quarter of the previous financial year. The rupee continued to touch all time lows during the week, creating severe volatility in the Indian stock markets. The rupee slumped to a record low near 69 to the dollar on growing worries that foreign investors will continue to sell out of a country facing stiff economic challenges and volatile global markets.

The Indian equity markets closed the week in the green. Majority of the sectoral indices ended in the red with Banking (down 4.5%), PSU (down 4.5%) and Realty stocks (down 4.1%), witnessing the maximum losses. IT stocks witnessed a huge spurt clocking a jump of 6.4% during the week. Pharma (up 3.5%), FMCG (up 0.8%), Power (up 0.2%) were few of the other gainers.

Source: Yahoo Finance

Source: BSE

India's gross domestic product (GDP) growth dived to a four-year low of 4.4% in the April-June quarter of 2013-14, against 4.8% in the fourth quarter of the previous financial year. Growth crashed as industry was under the pressure of high interest rates and the overall gloomy economic conditions. Much of the services sector, too, posted a modest growth, except for government expenditure boosted community and social activities. The farm sector continued to clock sub 3% growth, even as policymakers pinned hopes on higher growth in this sector for the rest of the year.

The Food Security Bill has been passed in the Lok Sabha by voice vote. The bill seeks to entitle around 67% of country's population to subsidized food. As per the bill, around 75% of the rural population and half of the urban population will receive around 5 kg of wheat, rice and coarse cereals at Rs 3 per kilogram (Kg), Rs 2 per kg and Rs 1 per kg respectively. It will have a one year time period for implementation. As per the food minister, the FSB is likely to raise the liability on the exchequer from Rs 900 bn at present to around Rs 1,300 bn. Also, the bill will require around 62 million tonnes (mt) of food grain a year. This compares to the average annual procurement of around 60 mt by the government. In essence the Bill will further burden India's weak fiscal situation. In addition to that is the question of its implementation. If the food actually reaches the needy then it would be successful. However considering that the government does not really have a good track record of implementing its populist programmes in the past; we wonder whether this endeavor would be successful or not.

The Lok Sabha has passed the Land Acquisition Bill. The highlight of the bill is that it calls for mandatory consent of at least 70 % of people for acquiring land for Public Private Partnership (PPP) projects and 80% of people for acquiring land for private companies. The bill also proposes compensation which may go up to four times the market value in rural areas and two times the market value in urban areas. It also proposes benefits such as land for land, housing, employment and annuities which may be given in addition to the one-time cash payments for the acquisition of a land. One major positive is that the bill will be applicable retrospectively to earlier cases where no land acquisition award has been made yet. Also in case, land remains unutilized after acquisition, the new bill gives states the right to return the land either to the owner or to the State Land Bank.

The bill has received mixed reactions from the real estate industry. Some are of the view that it will help speed up industrial investment. Industry leaders also believe that the bill will facilitate smooth and clear procedure and also lesser delays in acquiring land for development. On the other hand, according to Confederation of Indian Industry (CII), the cost of land acquisition is likely to increase by 3 to 4 times. This may make industrial projects unviable.

Now let us take a look at news from Corporate India.

Wipro has entered into a partnership with Qatar Airways to develop a range of aviation information technology (IT) products for them. The aviation IT product portfolio consists of two categories of solutions namely enterprise solutions and mobility solutions. The enterprise solutions would essentially comprise of crew management, route profitability analysis, loyalty management, in-flight catering, aircraft maintenance planning and crisis management. On the other hand mobility solutions would include products for pilots, cabin crew and flight dispatchers. In June 2013 quarter, Wipro's IT services segment saw a muted growth of 4.5% QoQ. The IT Products segment witnessed a decline of 24% QoQ during the quarter. This was mainly on account of lower capex from the Indian corporate sector. It must be noted that the company sells its IT products only in the Indian and Middle East markets. Therefore the slowdown in the Indian markets had an adverse impact on the growth of the segment.

India's leading telecom player Bharti Airtel has developed a technology, jointly with Japan-based SoftBank Mobile Corporation, that will help the company provide cost efficient 3G mobile phone services. The new technology uses a communications satellite as a transmission line. Bharti Airtel and SoftBank Mobile Corp have already conducted field trials in the Republic of Kenya. The technology is important for the development of mobile phone networks in rural areas in Africa and other areas where building facilities for fixed-line and mobile communications services is commercially difficult. The technology would enable Bharti to offer 3G service at a lower cost.

The state run Indian oil companies are likely to lose money on the sale of petrol on account of rising prices and falling rupee. It is important to note here that petrol is a fully decontrolled fuel. As per the financial daily, if oil companies are not allowed to raise petrol rates by Rs 5 per litre by first fortnight of September 2013, they are likely to suffer under recoveries for the first time in this financial year. As per the industry estimates, the average under recovery on petrol currently stands at around Rs 1.9 per litre. The under recoveries on other fuels like diesel, kerosene and LPG stood at Rs 10.22 a litre, Rs 33.54 a litre and Rs 412 a cylinder, respectively for the second fortnight of the current month. However, the Government is unlikely to go for a major hike in fuel prices before Parliament's monsoon session gets over.

44 domestic power firms' overall dues to Coal India Ltd (CIL) currently amount to around Rs 110 bn. As on 30th June, 2013, the dues of National Thermal Power Corporation (NTPC) alone accounted for around Rs 41 bn. Earlier in April, NTPC had refused any such liability saying that it had already paid for the quality it had received. The disagreement was on account of a shift in the coal grading and pricing methodology from the useful heat value to the gross calorific value system. The power ministry has written a letter to coal ministry that suggested appointment of a third-party to monitor sample testing at loading and unloading points. This was in response to several representations from power companies over grade slippages due to an improper sampling procedure adopted by coal companies. The overall dues to CIL the dues have gone up by 21% since April 2013. It is important to note here that this amount is enough to produce around 50% of the country's annual imports.

The global stock markets remained in a cautious mode over uncertainty as to when the cutback in stimulus measures will take place and a possible US led strike on Syria. Several measures of US confidence rose recently, reinforcing the view that the US economy is gathering momentum. This along with strong economic data from the Eurozone gives hope of a recovery in the world economy. The Indian equity market was marred with volatility this week on account of Rupee depreciation. Going ahead, a more stable and sustainable domestic economic environment could decide the future course of the Indian equity markets.