Analysing Economy and Financial Markets

Analysing Economy and Financial Markets

The factors that had been a cause of mayhem in financial markets all around the world till last week somehow started receding, as oil prices, which had breached the psychological mark of $30 a barrel inched back to $33, with a one year forecast of $38. The fear of the contracting Chinese economy with its regularly devaluing currency may also have diminished because of the opinion of certain leading economists that China’s economic troubles are unlikely to lead to the kind of financial crisis that gripped the world in 2008 as well as the reassurance of the Chinese government to the world that it would not  devalue its currency so as to wage a trade war. Thus, after a horrendous first fortnight in financial markets, with all the major indices having a free fall, the last week of the first month of the new year  brought some cheer to markets as investors returned to buy stocks on the last trading day.
After three flat trading days, stocks in Asia as well as Europe gained significantly with the BSE sensex  recording a gain of a massive 401 points and Nifty gaining 138 points. As against the overall loss last week, this week  ended with an overall gain of  330 points for BSE and 95 points for Nifty with these indices rising from 24,540 to 24,870 and from 7,468 to 7,563 respectively. During the week, gold prices moved up from $1,097 to $1,117 per ounce and rupee fell to 67.75 against the dollar , while touching a low of 68.08 on 28th January. Despite the overall gain during the week, foreign institutional investors were still net sellers in the equity markets.
The government’s major thrust on idle gold mobilisation through  the gold monetisation scheme, launched on 5th November last year, still did not reflect the desired impact as a total of only 900 kg of gold could be mobilised till date. During the week, the government came out with a clarification that  interest earned on gold deposits would be exempt from taxes including capital gains, and it has already been decided that banks will be paid a commission of 2.5% . The government also reiterated that in the course of any search operation by income tax authorities, gold jewellery to the extent of 500g per married lady, 250g per unmarried lady and 100g per male member of a family need not be seized.
This week, the most important news relating to the banking sector was about the stressed assets fund being set up under National Infrastructure investment Fund (NIIF) so as to make available equity in the very long term to troubled companies. The government is also thinking in terms of exempting some public sector banks from paying dividends because of their increase in bad loans. The RBI Governor actually hit the nail on the head when he said that some stressed loans have to be written down to improve the health of PSU banks so as to optimise their resources and pave way for mergers. So, the balance sheets of banks which are generally dirty to the core at present, being laden with identified stressed assets along with an equal if not more percentage of unidentified stressed assets, need to be cleaned.
It is important to note that the Reserve Bank has identified top 150  defaulters  and asked concerned banks to provide for those accounts so as to clean their balance sheets latest by March 2017. The government has already planned a capital infusion of  Rs 70,000 crore over the next four years for its banks, but following these RBI directives has asked these banks to present their business plans to understand their incremental capital needs; and estimates are that Rs 1.8 lakh crore of capital infusion may actually be required over these four years .
At the end of the week, the government,  on its Smart Cities plan,  announced the first list of 20 cities to be developed as such. Bhubaneswar in Orissa topped the city challenge competition. Pune and Jaipur were second and third. These cities will get funding from the Centre during the current financial year and about Rs 500 crore will be spent on each city in phases by the Centre, while the remaining amount will come from the states, urban bodies and private partners. Twenty three states including big states of Bihar and UP along with J&K were left out, as none of the cities from these states qualified in the first round. The government has now offered a fast-track window for the next rejected 23 cities based on their ranks to upgrade their proposals and submit them by April 15, 2016 for evaluation.
The Railway Ministry also issued guidelines restricting the number of online railway reservations for an individual user to six a month instead of the present ten a month. This provision will be effective from Feb 15 . Jet Airways, India’s premier airline, has introduced a new booking feature called ‘Farelock’, which allows passengers the flexibility to retain a selected fare for 72 hours. Service will be charged at Rs 350 for domestic flights and Rs 700 for an international ticket.
On the international front, the 45th Annual conference of the World Economic Forum, which was held for five days in the Swiss town of Davos, ended earlier during the week and was attended by 40 heads of governments, including German Chancellor Angela Merkel, French President Francois Hollande, Chinese Prime Minister Li Keqiang, Pakistan Prime Minister Nawaz Sharif and Swiss President Simonetta Sommaruga. Indian Union ministers Arun Jaitley and Piyush Goyal along with RBI Governor Dr Rajan as well as over 100 industry leaders from India represented the country at the conference. The high point here was the emergence of the Indian economy as a zone of opportunities for domestic as well as global companies. In terms of the annual global CEO survey released at the conference, India, along with USA, China, Germany and Britain, was considered one of the top five markets in terms of overall growth prospects. The high-profile RBI Governor took everyone by surprise at the conference when he did not share the anxiety and pessimism shown by  the impressive gathering of the business and political elite and he was quite emphatic that the fundamentals of the global economy did not justify the decline in asset prices. On the last day of the conference, all the panelists while speaking at  “The global economic outlook” session were unanimously of the view that India remains a bright spot in the global economy with a growth rate of over 7%, presently the highest in the world for any large economy.
The Bank of Japan also unexpectedly introduced a negative interest rate policy, stunning investors. In adopting negative interest rates, Japan is reaching for a new weapon in its long battle against deflation, which since the 1990s has discouraged consumers from spending because of ever-falling prices.
Another interesting piece of news during the week  was about the World Corruption Ranking announced by Transparency International, the globally-accepted coalition against corruption headquartered at Brussels, and out of the 168 countries ranked, India was at no 76, which is 9 places better than the 85th rank  it had last year and 18 places better than the 94th rank it had in 2013. Our neighboring countries, Sri Lanka, Pakistan and Afghanistan were ranked at 83, 117 and 166 respectively
On the macro economic front, there has not been any notable development during the week, as the Goods and Services Tax bill is still stuck in the impossibility of politics. One important development, however, was the announcement made by  Prime Minister Modi while addressing business leaders of France and India in presence of the French President regarding the controversial Retrospective Taxation being a thing of the past. He assured the gathering that this chapter would never be opened again and there would always be a predictable and prospective tax regime. It is a known fact that this Retrospective Taxation  has hurt many foreign investors in the past. Another important news has been the warning sounded by the RBI Governor against generating economic growth through additional debt, saying that any deviation from the fiscal consolidation path will hurt stability of the economy. Rajan said macroeconomic stability during the global turmoil cannot be risked and the government and RBI should continue to bring down inflation.
In the week ahead, it is expected that financial markets, while trying to stabilise, would continue the upward momentum. The Nifty, already having crossed a crucial hurdle of 7,500 is expected to sustain if the positive market momentum has to extend further. Market participants will be eagerly awaiting the Reserve Bank of India’s first monetary policy review in 2016, which will be the last before the budget. The policy would be announced at its meeting scheduled on  2nd February and in view of the expected clean-up in bank balance sheets, as desired by RBI and because of the fiscal deficit being under control, the RBI could cut rates by 25 bps. In my opinion this is the right time for long-term retail investors to abandon fear and be a part of the market by investing in specific large cap stocks.

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