It was a mixed week for the world stock markets. While the developed world except for the US showed resilience and ended the week on a positive note, emerging markets closed with a negative bias. The US stock markets were relatively flat registering minor losses of 0.6% during the week. As far as 2011 is concerned, the Dow Jones managed to gain 5.5% during the year. The ongoing debt crisis in Europe, rising oil prices and political crisis in Middle East overweighed markets.
The Indian stock markets were down by 1.8% during the week. Bank and Oil & gas stocks led the downfall. It may be noted that in 2011, Sensex lost approximately 25% due to concerns over rising inflation, high interest rates and emerging policy paralysis. It would be interesting to see how 2012 shapes up from here as interest rates have already shown signs of peaking. However, in the next year all eyes would be on the government as far as breaking the policy gridlock is concerned.
Amongst the other world markets, Brazil was down by 1.6% while China was down by 1.4%. However, UK and Japan were up by 1.1% and 0.7% respectively.
Amongst the sectoral indices, Oil & gas and banking stocks were the biggest losers. Concerns over asset quality and selling pressure on Reliance Industries due to the output issue from KG-D6 basin impacted the respective benchmark indices. Realty was also down by 3.6% during the week. However, IT and Pharma stocks showed resilience and were relatively flat during the week.
Now let us take a look at key economic developments. Petrol prices are likely to increase by Rs 2.25 per litre from Sunday. Post deregulation and rupee depreciation, oil firms have been revising prices on a fortnightly basis. However, considering that assembly elections are due in five states it would be interesting to see if the oil firms go ahead and increase the prices or defer the same on government's intervention. It may be noted that although petrol prices are deregulated state oil firms generally consult the government before affecting any price increase.
After falling to 1.81% last week, food inflation further fell to 0.42% and is now at a five and half year low. While the steep decline is due to higher base effect prices of essential items like rice, wheat and fruits have also declined substantially. Such a huge decline indicates that we are probably heading for a deflation next week.
Now let's take a look at key corporate events during the week. Power financier, Rural Electrification Corp (REC), has firmed up plans to raise US$ 500-600 m from overseas markets. The company had initially approached the divestment department in May with a proposal to raise US$ 1 bn through foreign currency convertible bonds (FCCBs). But this would have meant a significant dilution (over 10%) of the government's stake. It was then decided that a smaller amount would be raised, capping the dilution at 5-6%. REC's overseas bonds will have tenure of at least three years and offer a coupon of 2% payable annually with no redemption premium at maturity. These bonds will offer as conversion price a 30-35% premium to the stock price on the day the bonds are sold.
Public sector bank Industrial Development Bank of India (IDBI) has approached the Reserve Bank of India (RBI) to launch infrastructure debt funds (IDFs). It plans to launch this separately as a Non Banking Finance Company (NBFC) and plans to hold a 30% stake in it. Banks are currently allowed to hold a minimum of 30% and a maximum of 49% in IDFs. This new entity could be launched in 2-3 months time depending on the projects available.
India has pledged to spend US$ 1 trillion on upgrading its aging and inadequate infrastructure in the five years to 2017. The government finalized the structure of IDFs in June. It believes that this debt instrument can help source long-term funds to finance India's infra needs. These IDFs can also be set up as mutual funds, however in this case IDBI prefers to set up a separate company to take care of the same.
State Bank of India (SBI), India's largest lender is likely to be infused with Rs 60 bn equity by its largest shareholder, the Government of India. This infusion will go a good way towards strengthening the equity base of the bank and comes as a welcome relief, especially after it got its ratings downgraded by Moody's. SBI will not be the only beneficiary of this plan. Other PSU banks too will have their equity bases spruced up as the Government intends to spend a total of Rs 160 - Rs 170 bn towards equity infusion, SBI included.
National Thermal Power Corporation (NTPC) has outlined a capex plan of Rs 183.5 bn to develop two electricity generation projects in Karnataka and Madhya Pradesh. The proposal includes a 2,400 MW capacity plant at Kudgi, Karnataka at an estimated cost of Rs 151.7 bn and a 500 MW expansion project at Vindhyachal, Madhya Pradesh at a cost of Rs 31.8 bn. The projects are yet to receive environmental clearances. NTPC is targeting to achieve 128,000 MW by 2032 with 28% capacity from non-fossil sources. The company's share in the country's generation was 27.4% in 2010-11 forming 17.75% of the national capacity.
In some more news from the economy, India's fiscal deficit for the first 8 months increased to Rs 3.5 trillion. It may be noted that government had forecasted a fiscal deficit target of 4.6% for FY12 during the budgetary speech earlier in the year. Considering that the revenue receipts are dwindling and expenditures rising it would be a challenge for the government to the meet the set target. Higher deficit would mean government borrowing would also increase further pressurizing interest rates.
With this we bid farewell to 2011. It was a tumultuous year for equities with Sensex losing approximately 25% year to date. However, with the rate cycle peaking out and the government depicting willingness to prioritize policy issues we believe that India growth story is far from being over.