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Sensex Up Over 130 Points; Realty Stocks Witness Buying
Fri, 1 Sep 11:30 am

After opening the day marginally higher, stock markets in India have continued their momentum. Sectoral indices are trading on a positive note with stocks in the realty sector, auto sector and healthcare sector witnessing maximum buying interest.

The BSE Sensex is trading up 131 points (up 0.4%) and the NSE Nifty is trading up 36 points (up 0.4%). The BSE Mid Cap index is trading up by 0.8%, while the BSE Small Cap index is trading up by 0.9%. The rupee is trading at 63.97 to the US$.

In the news from global financial markets, data showed US consumer spending rose slightly less than expected in July. Also, annual inflation advanced at its slowest pace in more than a year.

The Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, increased 0.3% last month. This compares to a 0.2% gain in June and less than forecasts of 0.4%.

The personal consumption expenditures (PCE) price index excluding food and energy edged up 0.1% in July.

Further, the 12-month increase in the core PCE price index dipped to 1.4%, the smallest gain since December 2015. The index rose 1.5% in the 12 months through June.

The core PCE price index, which is the Fed's preferred inflation measure, has now risen by the same margin for three straight months. The annual rate has dropped by half a percentage point since February and the PCE price index has undershot the Federal Reserve's 2% target for the past five years.

The above data suggesting a moderate consumer spending, coupled with the tepid inflation casts doubt on Fed's decision to raise interest rates at its December policy meeting.

One shall note that Fed policymakers are concerned about the recent decline in inflation in the US. And this means the Fed could further delay an interest rate hike in its upcoming meetings.

Minutes from the Federal Reserve's July meeting indicated that some members called for halting interest rate hikes until it was clear the inflation trend was transitory.

The minutes also indicated the Fed was poised to begin reducing its US$ 4.2 trillion portfolio of bonds.

The Fed plans to start normalizing its US$4.5 trillion balance sheet 'relatively soon'. The central bank is said to follow a plan outlined in June to trim its holdings of US Treasury bonds and mortgage-backed securities.

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Normalising the balance sheet could impact emerging markets.

With the US economy chugging along for many months, the Fed has also been gradually easing off the stimulus it provides to the economy by raising interest rates to more normal levels.

Yet so far, the cost of lending has been slow to respond to the interest rate increases. But as the Fed continues with this policy, consumers who borrow to buy houses, cars, refrigerators, and other items will have to pay more for those goods.

That said, the question comes as why should India be worried about which way the American economy and interest rates are headed? Vivek Kaul has answered this in one of the recent editions of The Vivek Kaul Letter. As he writes:

  • The answer is simple. The United States still forms around one-fourth of the global gross domestic product (GDP). It remains the largest consumer in the world. And any global recovery isn't going to happen, without the American economy finding its way back to where it was during its heydays or somewhere close to it.

Apart from the above, global financial markets witnessed volatility on the back of geopolitical tensions between North Korea and the US.

The latest development in this regard is that the US flew some of its most advanced warplanes in bombing drills with ally South Korea on Thursday.

This was seen as a clear warning after North Korea launched a mid-range ballistic missile designed to carry nuclear bombs over Japan earlier this week.

One can expect yet another UN resolution against the country. More sanctions and maybe more dire warnings from Trump are possible. The US President has already said, 'all options are on the table'.

Global stock markets witnessed selling pressure this week owing to the above developments. However, should the US-North Korea tensions worry us?

Rahul Shah, co-head of Research at Equitymaster, has penned his views on the matter in a recent edition of The Equitymaster Research Digest (requires subscription). You can access the same here.

In other news, according to the Reserve Bank of India's (RBI) 2016-17 annual report, the total number of suspicious transaction reports filed by banking companies in financial year 2016-17 stood at 4,73,003. This represents a whopping 706% increase in suspicious transactions than what were filed in 2014-15.

This means that suspicious banking transactions increased by a whopping 300,000 in 2016-17 (from 61,361 in 2015-16 to 361,214).

Suspicious Transactions Spike Post Demonetisation

Spurious deposits made after the demonetisation exercise in November 2016 could very well account for the spike. This trail of 'suspicious transactions' and dubious deposits could provide valuable information to the authorities in tracing unaccounted money. The government and the RBI would do well to follow this trail of suspicious transactions.

The RBI is also working with the government to maintain a data on fake notes. It said the National Crime Records Bureau (NCRB) under the Ministry of Home Affairs has designed a uniform proforma for collection of Fake Indian Currency Note (FICN) data.

Also, a web-enabled software for uploading data on FICN detected by banks and law enforcement agencies has been developed. The RBI has confirmed it is facilitating implementation of the system in collaboration with NCRB.

The above steps by the RBI are a step in the right direction and will inevitably stop the circulation of fake currency in the system.

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Mar 16, 2018 (Close)