I want to break free - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
I want to break free A  A  A

19 JANUARY 2013

Indian equity markets, like the band Queen, want to break free. The BSE sensex has two crucial resistance levels of 20,500 and 21,000 to breach, corresponding to the level of 5,982 and 6,084 on the Nifty. If the higher of these is breached decisively, it would indicate a bull run to rival Pamplona.

The mark Ret has risen on the back of a new resolve to continued economic growth. Maybe politicians have finally understood that their chances of getting re-elected depend more on good governance and proper economic policies that allow people to prosper, than on creating divisiveness, hatreds and apprehensions. If that is, indeed, so, it would be a wonderful thing.

The overdue reforms that were announced last week were the deferment till 2016 of the introduction of GAAR (General Anti Avoidance Rules), which had created uncertainty in the minds of foreign investors because of a high degree of discretion and subjectivity. Needing the support of investors (especially in the background of threat by rating agencies to downgrade India's credit rating to junk status), the Government has decided to postpone the introduction of GAAR. It has not shelved the rules (foreign investors do indulge in tax shopping), perhaps heeding the words of the song 'Jub Gaar Kiya To Darna Kya?'.

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Then the Government put on its dentures of political courage, and bit the bullet on hiking diesel prices, by around Rs 0.50/litre and with bulk consumers to pay the full price. The Indian Railways would have to pay some Rs 2,700 crores more see here. Opposition parties, and some allies, immediately voiced their protest, on the grounds that it would hike inflation as truckers would hike freight rates across the board (wholesale price inflation would perhaps go up a half percent). That is a false argument, the figures of inflation are suppressed because of the subsidy which has to be funded in any case, so the hike is in effect a return to reality.

For political reasons, the cap on the number of subsidised LPG gas cylinders has been raised to 9/household.

Following this announcement, the stock prices of the three OMC (oil marketing companies), viz. Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) rose sharply, as their cash flow improves because of the hike in diesel. They otherwise have to wait until the Government partially compensates them for its policy of subsidising petro products, and to raise money through borrowing, in the meantime. Stock prices of Oil and Natural Gas Corporation Ltd. (ONGC) and Gas Authority Of India Ltd. (GAIL) also rose, as their share of funding the under recoveries by OMCs, would be lower.

A longer term solution would be to have greater public transport which is efficient and affordable, so that people rely less on private transport. Once such public transport systems are built, the Government needs to discourage the growth and use of cars. All past Governments have also been irresponsibly lax in setting fuel efficiency standards for vehicles. The US did this in 1975, after the first oil shock, by introducing a legislation called CAFE (Corporate Average Fuel Efficiency), which imposed standards of fuel efficiency on auto makers. The standards kept getting tougher. Last week Petroleum Minister Veerappa Moily announced that his ministry was looking into such standards.(See here).

Another welcome news was that the Finance Minister was going to announce, in his Budget, the amendments to the GST (Goods and Services Tax) Act that would allay the concerns of, and obtain the cooperation of, State Governments. If GST finally does manage to weave its way through political constituencies, it would be a most bullish factor, and is estimated to add 1-2% to GDP growth.

The corporate sector also pitched in to help the bull run last week. Infosys, the first to announce quarterly results for the December quarter, gave a pleasant surprise, with a better guidance than expected, and its stock shot up a whopping 17% in a day. TCS, Axis Bank, Yes Bank, HDFC Bank, ITC and Reliance also came up with good results.

Consequently the BSE-Sensex gained 375 points over the week to end at 20,029, and the NSE-Nifty added 112, to close at 6,064.

What are the forthcoming events that could see the market finding resistance at the 20,500-21,000 levels for the sensex? The Reserve Bank of India (RBI) reviews its policy on Jan 29th and the market is expecting an interest rate cut of 25 basis points (0.25%). The RBI Governor has resisted calls for such cuts, and rightly so, as he fears stoking inflation. Last week he has stated that although the wholesale price inflation has come down somewhat, it is still too high. Consumer price inflation has gone up. Judging by these comments, it suggests that an interest rate cut cannot be presumed and perhaps, that may cause the sensex to retract from the resistance levels.

A retraction could take it to, at worst, the 18,500-19,000 levels.

The end Jan RBI policy review would be followed by an end Feb Union Budget. The Rail budget is a non-event, as the Railway Minister has, wisely, already raised fares.

In the Union Budget, the main figure investors would be watching out for is that of the fiscal deficit. The Finance Minister is dipping into his hat to contain it, and he may well succeed. Aggressive disinvestment of public sector company stock would fetch him perhaps Rs 25,000 crores. A settlement with Vodafone seems on the cards; perhaps the FM may waive interest and penalty for a quick infusion of much needed cash. Auction of spectrum could also generate some amount, after the reserve price for CDMA spectrum has been halved. If, using artifice, arm twisting, accounting tricks and auction of spectrum, the Finance Minister is able to contain the fiscal deficit, the market would cheer.

Globally there still remain lots of concerns.

The US Social security system is broke (see here) and the issues over raising the debt ceiling are not over. If the debt ceiling is not raised, the US Government would have to cut expenditure or delay payments. If it were to delay payments on US Treasury bonds, then its ability to keep selling them would be severely impaired. If, instead, it were to delay payments to pensioners whilst paying investors, there would be a public outcry.

Perhaps fearing the consequences of financial turmoil, Germany has asked for its gold back, from USA (see it-begins-bundesbank-commence-repatriating-gold-new-york-fed). Thats 3,396 tonnes of gold, representing 45% of Germany's gold reserves . This suggests German anticipation of financial turmoil and a weak $.

So, one should be cautious at the coming resistance levels of 20,500-21,000 from where there could be a temporary halt to the bull rally. Thereafter the rally would pick up steam, based on the continuing commitment to economic reform and good governance. So long as politicians believe these can deliver results for them, they would usher and support reforms. Let's hope they do not go back to their wayward ways of trying to divide and rule.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
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6 Responses to "I want to break free"
Jan 24, 2013
The US has gone crazy!
If all the debt in the country is called in the country would be in tatters.
Obama and his cronies prefer to incur more debt and boost the stock market to keep calm the public's sentiment rather than cut expenses and discipline themselves.It takes a lot of effort to do that and its easier to just set a record for the stock market as though that's the only barometer.
J Mulraj
Jan 21, 2013
Thank you, readers, for your kind comments. AD3, you are extravagantly kind.

Rizwan, on subsidies, yes, there is empathy for the common man. The truth, however, is that the subsidy has to be borne by someone. If the Government bears it, then, when it is running into a deficit, as ours is, it has to either raise taxes or borrow more to pay for the subsidies.

No one likes the former.

When the Government borrows more, it increases its debt service problems, but also drives out private borrowing. Companies find it harder, and more expensive, to borrow, and so have less funds to invest in new projects. This increases job losses.

The Government is working on targetted subsidies, through Aadhar, which will help the deserving. Right now the subsidised price helps both the deserving and the non deserving.
Jan 20, 2013
Excellent article Sir !
All the possibilities in future are well explained.
Successive governments in India have promised so many things but nothing has proven materialistic.Unless we have efficient public transport system there is no point in speaking of CAFE etc.In China there are hardly any private cars. They travel on bicycle (If you ask the same in India we will think it's below dignity !)We Indians see ourselves in Bollywood style life, which is only in movies & not practical life.Let us hope Rahul brigade will do something Extraordinary !
AD 3
Jan 19, 2013
We have heard of:

Licence raj

Quota Raj

Reservation Raj

Ram Raj

but the most eagerly awaited is .......

Like (3)
Jan 19, 2013
Very interesting. Thanks Mr. Mulraj. Like (1)
Jan 19, 2013
Sir, your appreciation of governments economic policies are logical ... but you should also consider the impact of these policies on the common man....with job loss & no employment opportunities in most of the sectors ( I am an example) common man is getting impacted due to this price rise ... how will the common man raise to the occasion .... are u going to say that "water will find its own levels" ????? Like (1)
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