The US Federal Reserve finally did what investors had been anticipating for seven months. It announced that it would begin to scale back its monthly bond buying program to US $75 bn from US $85 bn beginning January. Investors responded enthusiastically, taking the move as a sign of confidence in the economic recovery. The response was in sharp contrast to earlier fears. The announcement pushed gold prices down to a low for 2013. Through the week, global stocks rallied, particularly European stocks, while Asian shares were mixed. The US markets closed up 3% for the week.
In addition to stronger US figures for productivity and industrial production, consumer inflation in the United States, United Kingdom and Eurozone remains very low. UK's unemployment fell to 7.4% in the three months ending in October, its lowest level since April 2009. The jobless rate is approaching the 7% threshold, the point where Bank of England officials say they will consider raising interest rates.
The Indian equity markets kicked off the week on a muted note considering quiet global cues. On Wednesday, key indices surged in response to the RBI's status quo stance on key policy rates. However, this optimism didn't last too long as the taper talk from the US Fed led to a selloff in banking counters. The concluding session once again surprised market participants as we witnessed a massive rally. The BSE Sensex advanced by 1.8% over the previous week's closing.
Majority of the sectoral indices ended in the green with IT (up 5.8%), Pharma (up 5.3%) and Realty (up 5%) witnessing maximum buying interest. Stocks from Banking (down 0.6%) sector were the only losers.
Now let us discuss some of the economic developments of the week gone by.
Despite inflation levels remaining high, the Reserve Bank of India (RBI) in its monetary policy has kept key rates unchanged. Thus, repo rate and Cash Reserve Ratio were maintained at 7.75% and 4% respectively whereas the Marginal Standing Facility was kept at 8.75%. RBI's stance of keeping status quo also stems from the uncertainty surrounding the outlook for inflation with signs of likely fall in vegetable prices and weak state of the economy. The Wholesale Price Inflation for the month of November shot up to a 14-month high of 7.5% YoY on the back of high food prices. The RBI governor has said that that there are indications from the metros that the vegetable prices are expected to fall significantly both at the wholesale and retail level which has lent credence to keeping interest rates stable. At the same time, RBI has said that it will remain vigilant on inflation levels in the economy and also the possibility of tapering of quantitative easing by the US Fed that can disrupt external markets.
According to a leading financial news network, the government is considering drastic cuts in its budgeted expenditure to meet its fiscal deficit target. The finance ministry is considering cutting its planned expenditure by up to 19% to enable the government to meet the self-imposed deficit target of 4.8% of GDP for this financial year. The planned expenditure in the union budget was pegged at Rs 1,100 bn. However, tax collections have been tepid in the first half of the year. Moreover the government's disinvestment plan has faltered. While the original disinvestment target was Rs 540 bn, the expectations have now been reduced to about Rs 200 bn. Due to all these factors the finance ministry is working on methods to cut back on several key programs to keep the fiscal deficit in check.
As per a leading financial daily, Wholesale Price Inflation (WPI) for the month of November jumped to a 14-month high of 7.5% on a YoY basis after rising by 7% YoY in October. The steep escalation has been on account of food prices that rose by 19.9% YoY in November, faster than 18.2% rise in October. Burgeoning food prices have pushed retail inflation to its highest level of 11.2% in November as per Government data. While current account deficit has narrowed down significantly after imposition of curbs on gold imports, inflation continues to rule high. This is likely to put the Reserve Bank of India in a fix with respect to reduction in interest rates, a measure desperately awaited by Corporate India to revive from slowdown.
The Indian telecom industry is poised for greater capex spending post the upcoming 2G auctions. A total of 403.2 MHz of spectrum will be auctioned in the 1,800 MHz (GSM) band on 23rd January 2014. The government has fixed the pan-India price at Rs 17.65 billion per MHz, as against Rs 14.96 bn suggested by TRAI. This price is around 26% lower than the reserve price in March 2013 of Rs 23.78 bn but remains 18% higher than the price suggested by the TRAI in September 2013. The auction is expected to get a good response from telcos because the incumbent operators like Bharti Airtel, Vodafone, and Idea have licenses which will expire over next few years. They have to participate in the auction to acquire the spectrum. After acquiring the spectrum each operator would have to quickly ramp up their capex to roll out services. This could result in additional stress on their balance sheets if they were to resort to debt financing for the same.
Now let us move on to some more news from the corporate world.
India's largest software firm, Tata Consultancy Services (TCS), has won a large Business Process Outsourcing (BPO) contract. The contract was awarded to TCS by the British energy producer Npower. Npower is a subsidiary of the German energy giant RWE. As per the contract, TCS will take over all non-phone based back office and customer care operations of Npower. TCS will focus on delivering more efficient, flexible and improved customer service to Npower's customers in the U.K as well as enabling the company to reduce costs. Npower would cut its 11000 strong workforce by about 1450 but will not outsource the phone based work, done by its U.K call centers. Revenues from BPO as well as revenues from the U.K are about 12% of total revenues for TCS.
The biotechnology major Biocon has recently entered into a licensing and collaboration agreement with Quark Pharmaceuticals Inc for the development of a range of siRNA (small interfering RNA) based novel therapeutics. This arrangement is likely to enable Biocon to co-develop, manufacture and commercialize QPI-1007, a novel siRNA drug candidate for ophthalmic conditions for India and other key markets. As per the agreement, Biocon will have access to Quark's innovative and proprietary siRNA technology platform that can be used for the development of novel therapeutics for various unmet medical needs. The financials details have not been disclosed.
Larsen & Toubro (L&T) Ltd's power transmission vertical has bagged an EPC (engineering, procurement and construction) order for setting up transmission and distribution network in Qatar. The order is valued at Rs 29.4 bn and has been offered by Qatar General Electricity and Water Corporation for supply and commissioning of transmission lines and substations. The scope of work for the company includes supply, erection, testing and commissioning of switch gears, power transformers and auxiliaries. The order is part of expansion of the Qatar Power Transmission System. As per the management of L&T, the order aligns well with the company's expansion plans in the international arena. The project is scheduled to be completed in 22 months.
Following the Reserve Bank of India's decision to not change key interest rates in its mid-quarter monetary policy review meet, leading housing financiers State Bank of India (SBI) and Housing Development Finance Corporation (HDFC) have announced a reduction in home loan interest rate with effect from December 20, 2013. Until yesterday, leading PSU bank SBI was charging 10.30% for home loans up to Rs 30 lakh and 10.50% for home loans above Rs 30 lakh. Henceforth, the bank has lowered interest rates for home loans up to Rs 75 lakh to 10.15%. On the other hand, HDFC which was charging 10.5% for home loans up to Rs 30 lakh and 10.75% for home loan between Rs 30 lakh and Rs 75 lakh, has now lowered the interest rate to 10.25% for loans up to Rs 75 lakh. However, the housing financier has said that these rates would be applicable for applications made up to January 31, 2014. Moreover, the first disbursement would have to be availed by before February 28, 2014.
IDFC, an infrastructure financing arm and applicant for a banking license, has said that it will work towards bringing down foreign shareholding to below 50% in the event of acquiring a banking license from RBI. As of 6 December 2013, the actual foreign shareholding in the bank was around 51.27%. As per RBI guidelines, the eligible promoters of the bank should be 'owned and controlled by residents'. The Board of Directors of the bank passed a resolution on December 19 for a postal ballot to seek shareholder's approval for reduction in the foreign shareholding limit from 54% to 49.9% in various stages. The bank has also said that in the event on non-receipt of banking license from RBI, IDFC will take steps to reinstate the foreign shareholding back up to 74% subject to regulations prevailing at that time. IDFC is among the 25 applicants that have applied for a bank license likely to be issued next year. Other applicants include India Post, IFCI, Anil Ambani Group and Aditya Birla Group. Tata sons had withdrawn its application last month
Going forward, most of the uncertainty regarding the RBI and Fed has been done with. However, investors should not take their investment decisions based on specific events. They should note that short term developments should not form the only basis for investment decisions. Indeed, the focus should be on stocks of companies that have good fundamentals and a sound management.