Indian Markets End Flat

Indian equity markets registered some losses in the final hour of trade to finish just below the dotted line. At the closing bell, the BSE Sensex stood lower by 52 points, while the NSE Nifty finished down by 25 points. The S&P BSE Mid Cap finished down by 0.1%, while the S&P BSE Small Cap finished up by 0.4%. Losses were largely seen in consumer durables & oil & gas stocks.

Asian markets finished mixed as of the most recent closing prices. The Shanghai Composite gained 0.04%, while the Nikkei 225 led the Hang Seng lower. They fell 0.41% and 0.19% respectively. European markets are trading firm. The FTSE 100 is up 0.77% while the DAX gains 0.46%. The CAC 40 is up 0.21%.

The rupee was trading at 66.52 against the US$ in the afternoon session. Oil prices were trading at US$ 45.3 at the time of writing.

Shares of Berger Paints finished on an encouraging note (up 0.3%) after it was reported that the company is planning to invest around Rs 5 billion. Berger Paints plans to expand capacity and set up new units over the next three years till FY20. The company is expected to increase capacity by around 25% or by 10,000 tonne per month across both decorative and industrial paints.

Currently, the total capacity stands at around 32,000 tonnes per month for decorative paints and at 6,000 tonnes per month in the industrial paint category.

Besides, expansion will also be carried out at Jejuri (Maharashtra) and Hindupur (Andhra) units. The total capacity addition across these two units will be around 6,000 tonnes per month. Berger will also set up a mixing unit at Gujarat at a cost of Rs 100 million, while an emulsion unit (the basic raw material required for paint) will come up at Rishra (West Bengal) at an estimated cost of Rs 250 million.

Berger Paints India is the second largest paint company in the country with a consistent track record of being one of the fastest growing paint company, quarter on quarter, for the past few years.

Moving on to news from banking sector. According to a leading financial daily, State Bank of India (SBI) has raised Rs 21 billion through perpetual bonds in order to boost its capital base as well as business growth.

The bank has issued and allotted 21,000 AT1 Basel III compliant Non- convertible, Perpetual, Subordinated, Unsecured Debt instrument in the nature of debenture, of face value Rs 1,000,000 each at par through private placement bearing coupon at 9% p.a. payable annually with call option after 5 years or any coupon payment date thereafter aggregating to Rs 21 billion in first tranche, to Yes Bank.

Meanwhile, according to company's chairperson Arundhati Bhattacharya, SBI may relocate some branches after the merger of its associate banks into its fold, but none of them will be shut down. The merged entity, which will have a network of more than 24,000 branches, will continue to have the same number of branches. The idea would be to leverage the synergies.

SBI is looking to add US$120 billion (Rs 8 trillion) in assets after the merger of State Bank of Bikaner and Jaipur, State bank of Travancore, State Bank of Patiala, State Bank of Hyderabad and State Bank of Maharashtra.

Buying was witnessed across majority of the PSU banks with Canara Bank and Punjab & Sind Bank leading the gains.

Oil & Gas Stocks Out of Favor
01:30 pm

Indian Indices continue remain sluggish during the post-noon trading session amid mixed international markets. Stocks from the realty and PSU sectors are witnessing maximum buying interest. While power, oil & gas are leading the losses.

The BSE Sensex is trading higher by 13 points (up 0.1%) while the NSE Nifty is trading lower by 8 points (down 0.1%). The BSE Mid Cap index is trading higher by 0.1% and BSE Small Cap index is trading higher by 0.5%. Gold prices, per 10 grams, are trading at Rs 31,365 levels. Silver price, per kilogram is trading at Rs 47,284 levels. Crude oil is trading at Rs 3,007 per barrel. The rupee is trading at 66.37 to the US$.

IT stocks are trading on a mixed note with Hexaware Technologies & HCL Technologies leading the gains. The share price of Wipro increased by 1.24% on bourses in early trades today after it declared that it has won three years strategic IT contract from Norway-based rail company, NSB Group. NSB Group is involved in operations ranging from buses, passenger trains, freight, real estate development, and rolling stock maintenance in Norway and Sweden.

As a part of the deal, Wipro will implement its Boundary Less Datacenter (BLDC) and Live Workspace solutions. The company will utilize its next-generation delivery framework to deliver services. Essentially, the contract will cover data centers and workspace solutions, and will help NSB prepare for proposed reforms in Norwegian railway sector.

As per Wipro's management, partnership with NSB will have significant positive impact on Norwegian transportation sector. The company is looking forward to leveraging its transportation sector domain expertise, coupled with their deep infrastructure services capability and technology know-how.

India is an information technology powerhouse. In an extremely challenging global economy, western corporations are now expecting Indian IT firms to deliver a more compelling value proposition in terms of growth prospects. Going forward, whether the Indian IT firms are up to the task will be the key thing to watch out for.

In another development, it was reported that, TCS has partnered with Sastra university to establish a Teacher's Training Centre at the University. The objective of the program is to familiarize the school teachers with emerging digital-based teaching methods and reinforce the value of teaching as a profession. Over 2,000 school teachers from various educational institutions across tier-2 and tier-3 cities in Tamil Nadu will be trained.

With digital media increasingly becoming an integral part of the lives of Indians, government has also launched its Digital India programme to bring the digital revolution to the masses and empower them. Significantly, the government's move, if implemented well, is sure to bring in a refreshing change to the education system.

Moving on to the news from auto sector. As per an article in The Economic Times, Tata Motors have announced that it has received orders of over 5000 buses worth Rs 9 billion from 25 state transport undertakings (STU) across the country. Bulk of these contracts have come from states like Uttar Pradesh, Andhra Pradesh, Uttarakhand and Himachal Pradesh.

This resulted in a 80% jump in the company's order book compared to last year, representing a healthy growth outlook in commercial vehicle segment. This big buying is being witnessed after a massive gap of nearly four years in STUs.

Reportedly, Tata Motors has also developed Electric Hybrid buses to meet the future transport needs for Envisaged Smart Cities, both of which will soon be seen on Indian roads. To ensure trackability and traceability, Tata Motors will initiate technology such as GPS enabled on-board intelligent transport system, public information system, CCTV cameras and smart multi-mode ticketing.

Over 1500 ordered buses will be fully built and integrated with the features above at Tata Motors JV manufacturing facility at Tata Marcopolo and ACGL Goa, the company stated.

With large auto makers already investing in these emerging technologies, it is clear that Tata Motors needs to make the move quickly to avoid losing out the race particularly when technologically assisted driving can soon become a reality.

Tata Motors was trading down by 0.6% at the time of writing.

Listless Gains for Indian Indices
11:30 am

After opening the day on a flat note, the Indian stock markets have continued to trade near the dotted line. Sectoral indices are trading on a mixed note with stocks from the realty and metal sectors leading the gains. Telecom and oil & gas stocks are trading in the red.

The BSE Sensex is trading up by 36 points (up 0.1%) and the NSE Nifty is trading up by 7 points (up 0.1%). The BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap index is trading up by 0.6%. The rupee is trading at 66.33 to the US$.

Mark Mobius, executive chairman, Templeton Emerging Markets Group at Franklin Templeton Investments has said that India is in a takeoff stage and is growing faster than China. The fund manager, in an interview with the Economic Times, also stated that valuations of Indian markets are not looking expensive amid the low interest rate environment.

He also shared his views on the Goods and Services Tax (GST) Bill. When asked about what has changed for Indian markets after the passage of the GST Bill, Marc said that the real challenge that remains now is the implementation of GST. While addressing this he said that the real focus now should be on implementing the GST.

As far as our views are concerned, India still needs to improve in many areas. While it is in a takeoff stage and is the fastest growing economy, there are structural changes required in many areas. Vivek Kaul, editor of the Vivek Kaul's Diary, had written many articles on the sorry state of India's economy. He has also just launched the Vivek Kaul Letter which outlines the Indian economy and its challenges.

On the GST front, we believe that while the bill has been approved by most of the leading parties and states, the tax is far from a done deal. The GST council, a very important part of the process, will need to be set up. It will be the job of the council, which will be two-thirds represented by the states, to decide on the GST rate after which three GST Bills (Central GST, Integrated GST, and State GST) mentioning the actual rates will be sent to Parliament and state assemblies for approval. To know more about GST, please read Vivek Kaul's report titled GST & You: What the Media DID NOT TELL YOU About the GST.

Moving on to the news from global markets... Economists are of the view that European Central Bank President Mario Draghi is highly likely to lengthen quantitative easing (QE) for the second time. This is gauged by many participants as the euro-area inflation has been stuck near zero for almost two years and the Brexit has threatened the recovery of the European Union (EU).

A leading financial daily suggests that more than 80% of economists in a Bloomberg survey expect such a decision. If Draghi does so, the move would take the asset-buying programme beyond its current-end date of March 2017 and above the target of 1.7 trillion euros.

The European Central Bank, earlier in December, announced stimulus measures and cut its deposit rate into negative territory. The governing council of the bank decided that the interest rate on the deposit facility will be decreased by 10 basis points to -0.30%, with effect from 9 December 2015. Mario Draghi announced that the ECB would extend its asset purchase program until March 2017.

We've written about the effects of low interest rates and central bank policies many times before. Bill Bonner, for instance, recently explained what it takes to survive in an era of low interest rates. And an article from Vivek Kaul's Diary - God, Government, and YOU - offers two theories and explains how they influence policies of central bankers and economists.

Indian Indices Open Flat
09:30 am

Major Asian stock markets have opened the day on a mixed note with the stock markets in Taiwan and China are trading higher by 1% and 0.3% respectively. While, the stock market in Japan is trading lower by 0.8%. Benchmark indices in Europe ended their previous session in red. While, benchmark indices in the US ended their previous session on a positive note. The rupee is trading at 66.51 per US$.

Indian stock markets have opened the day on a flattish note. The BSE Sensex is trading higher by 84 points (up 0.3%) and the NSE Nifty is trading higher by 12 points (up 0.1%). Both, BSE Mid Cap and BSE Small Cap are trading higher by 0.3% and 0.5% respectively.

Major sectoral indices have opened the day on a positive note. Stocks from realty and metal sector are witnessing maximum buying interest.

As per an article in Business Standard, Indian Hotels Company has contested a decision of the Delhi High Court. The order was pertaining to auctioning of one of its prime properties in Delhi popularly know as Taj Mansingh.

The company had got this property on lease from the New Delhi Municipal Council (NDMC) for a period of thirty-three years. This lease had expired in the year 2011 and saw several extensions since then.

Reportedly, Taj Mansingh is a 294-room property, located in Lutyens Delhi and is a key asset operated by the company.

This hotel contributed to around 6.5% to the overall revenues of the company. An unfavorable decision may prove to be a dampener on the financials of the company. The stock is trading down by 1.5%.

In another news update, Yes Bank is preparing to launch its first offshore dollar bond issue of US$ 300-500 million before March 2017. The funds will be used for its offshore branch at the GIFT city in Gandhinagar.

As reported in Livemint, the offshore branch is meant to function as a foreign branch of the domestic bank and lend in foreign currency.

GIFT City, set up in January last year is India's first international finance centre. Apart from Yes Bank, lenders such as State Bank of India (SBI), ICICI Bank and HDFC Bank have purchased land at GIFT City to set up their international banking units (IBUs). A bank branch at GIFT City will be regulatory treated as a foreign branch.

The offshore bonds will help the company in raising cheap funds which in-turn will help them to support the Net Interest Margins (NIM). The stock is trading down by 0.8%.

Bond Markets and the Threat to Banks

Whenever corporates require a loan, (whether short term or long term) the bank is the only option for most of them. Now a bank's lending rate depends on its base rate. The base rate is the reference interest rate based on which a bank lends to its creditworthy borrowers.

A host of factors, like the cost of deposits, administrative costs, the repo rate, a bank's profitability in the previous financial year, and a few other parameters, with stipulated weights, are considered while calculating a bank's lending rate.

Now, whenever the RBI reduces the repo rate, it incentives banks to borrow from the central bank at a cheaper rate. This, in turn, reduces the lending rate/base rate of the bank. So a reduction in the repo rate should be followed by a reduction in the lending rate. However, this is not the case.

Banks are holding back their lending rates from falling and therefore, interest rates continue to remain more or less where it was a few quarters back. This means, despite reducing repo rate by 100 bps in the last 18 months, banks continue to be parsimonious with their lending rates. This means, retail customers, and lower rated firms and a vast lot of small and medium enterprises dependent on bank loans -have no avenue to tap but look up to banks for their funding needs.

But there is another option. The bond market. It is where yields are falling, responding to central bank's repo rate. No wonder, then, that the banks are losing their business to the bond market, as better rated firms swarm the market with their bond offerings, which are also bought by the banks as investments. According to Moody's estimate, the corporate bond market amounts to 31% of total credit to the corporate sector in India.

Big and well-rated corporates are now unlikely to head to banks for loans, as the difference between lending rates and the bond yields will continue for a long time to come. Thus, banks are losing out big time and are building up systemic risk for themselves.

As the bigger corporates shift to the bond market route, banks are increasingly ending up with risky clients. These clients cannot hope to raise money through the bond route. This is because the bond market requires rating appraisals and these risky companies would possibly get a junk rating. If banks are not careful, they are going to really put their depositors' money at risk. With this, banks will be raising the prospect of asset quality stress that banks are still suffering from.

However, recently, the RBI stated that it will cap exposure of banks to lend to large borrowers. Further, it will also take steps to deepen the corporate bond market. By limiting banks' ability to lend beyond a level to highly leveraged companies, the central bank is making sure that the firms themselves tap the market and not overburden the banking system, especially in cases of long-gestation project loans. While the central bank has become impatient on banks not lowering the rates, it is also creating the environment for firms to shun banks for a large part of their credit requirements.

Banks have been reluctant to pass on any rate cuts from the central bank to corporate customers as they need capital to fix their balance sheet. This means it is more attractive for companies to issue debt than depending upon their bankers.

Will the banks reduce their lending rates in the coming months? It's anybody's guess.