Economy & Finance: The week that was

Economy & Finance: The week that was

During the week that has gone by, stock markets  witnessed severe volatility but overall the markets  ended the week with a gain of  723 points for BSE and  230 points for Nifty as these indices rose from  22986 to 23709 and 6980 to 7210 respectively . This was the highest weekly gain in our stock markets during the last four months. Foreign institutional investors continued to be net sellers at the end of the week and the total outgo of foreign funds from our stock markets now amounts to a staggering 2.47 billion dollars since the beginning of New Year. This week’s  gain in the  markets is actually in line with the global markets and can be attributed to a brief rally that was seen in the prices of crude  during the week, as the oil prices shot up by more than 14 per cent in the last three days up to Thursday  after Saudi Arabia and Russia, supported by other exporters, including Venezuela and Iraq, decided to freeze oil output at January’s levels. Iran also expressed support for this move to freeze production in an over supplied market, but a formal agreement in this regard is still awaited and if approved, it would be the first such agreement in 15 years among the Organization of the Petroleum Exporting Countries and non-OPEC members.
However on the last day of the week this rally in oil prices came to a halt , as the experts began to doubt the actual implications of any such agreement as the data showed that  US crude inventories rose 2.1 million barrels last week, to a peak of 504.1 million barrels, the third week of record highs in the past month. Thus the gloom that has descended on the stock markets since the beginning of the year may have dampened to some extent, but because of the global factors such as Currrency devaluation , falling crude prices and Chinese economy  continuing to have a free hand market sentiments are actually not picking up for the positive, notwithstanding the fact that Indian economy continues be a growing economy. The game changer in this respect could be the upcoming budget and if budget proposals are growth oriented with focus on investment spending without compromising on fiscal deficit numbers, we should expect the economy to pick up for the better slowly and steadily leading to stability and growth in earnings which would automatically reflect in stock prices.
As the investors continued to ensure risk aversion, the gold prices further strengthened on the basis of a firm global trend with increasing local demand on account of the marriage seasons and the prices gained Rs.540/- closing at Rs.29290 per 10 grams. Silver prices also gained Rs.375 to close at Rs.37475 per kg. Internationally the gold gained 1.85% and silver 0-75% during the week. The rupee is approaching a record low and may breach 70 mark in the near term . At the end of the week , it closed at 68.48. However , RBI is not unduly worried about this fall , as it believes that the fall is orderly and global factors and market fundamentals are driving the same.
Over the last few weeks, I have been emphasizing that stability of capital Markets and a growing banking sector are the two important indicators of a budding economy. Whereas, it is understood that it may take some more time for equity markets to stabilise, but the real issue of concern  are the banks and the problem seems to become more and more complex with no solution in sight. The matter has assumed such serious proportions that the Supreme Court inserted itself into this debate during the week and asked RBI to submit details of all defaulters with loans of Rs.500 crore and above in the past five years. It is quiet evident by now that for a long time, the regulator RBI did not mean serious business and it did not take timely desired steps to ensure meticulously correct classification of assets, as banks till date have definitely not been honest in their asset classification and worries on account of factors causing stress to assets have been swept under the carpet for the fear of asset class change which could have lead to more provisions and consequent depleted profits. Now when RBI had no other option but to intervene directly, it has in a knee jerk reaction asked the banks to  clean their balance sheets in one go by March 2017  and because of this we have seen NPAs of the banks increase by a staggering 90000 crores in the last quarter. Provision creation for such assets has eaten into entire profit of banks and many such banks have actually posted a loss during the December quarter. These banks are starved of capital now and are looking at ways and means for mobilizing capital. It seems that a severe banking crisis is in the offing and recapitalizing the banks may not be an easy task . With the exception of few strong banks , these banks may not be in a position to mobilize fresh as they do not have any other source of capital  other than the government .The government has committed only 70000 crores of capital infusion in such banks during the five year period whereas the actual need of the capital is far more and this need is continuously going  up, as has already been confirmed by two of the leading banks , SBI and PNB , who are expecting more and more provisioning in the quarters ahead. It is also quiet understood that with the profitability at its lowest, the credit profile of these banks will come under tremendous stress in the absence of suitable required capital. The effect on earnings and credit profiles would have been less dramatic had the provisioning process been spread out over a longer period .In this regard the Former Chairman of SBI Mr. Pratip Chaudhary has rightly stated that this asset quality problem in banks has become so severe because of lack of practical initiatives by RBI in the initial stages, as in his opinion uniform provisioning standard should have been introduced long back. Earlier individual banks as a part of a multiple lending mechanism were free to classify assets, which meant that the same loan could be a performing loan with one bank and non performing with other. At the end of the week there were speculations that the Centre is likely to set up a “bad bank” to take over the non performing assets (NPAs) of the country’s financial institutions, and in this connection, a policy is already being examined. Earlier during the month, RBI governor Mr.Rajan had shot down the idea of creating a bad bank for taking over stressed assets of public sector banks. Creation of a bad bank however could be a shot in the arm for public sector banks and it could be instrumental in heralding a new era for banks.
The week long Make in India event  which was inaugurated by Prime Minister Narendra Modi  on February 13 has come to an end and  it is reported to have secured investment commitments worth Rs 15.2 lakh crore, with host state Maharashtra alone accounting for Rs 8 lakh crore. This compaign is actually directed at ensuring success of the government’s push to create jobs by increasing the share of manufacturing to gross domestic product from existing 16 percent to 25 percent over the next ten years. Whereas the initiative taken by the government has been appreciated at the industry level , but the entire positive atmosphere created by the event was desecrated by an Income Tax notice served to Vodafone during the week   over a retrospective tax claim and only last week , Prime Minister Modi while addressing business leaders of France and India in presence of French President had said that controversial Retrospective Taxation is a thing of past and had assured the gathering that this chapter would never be opened again and there will always be a predictable and prospective tax regime.
During the week a little known company Ringing Bells created a stir all around the country as it announced online sale of its smart phone priced at Rs.251  and BJP Senior leader Murli Manohar Joshi was the chief guest at the inaugural launch function of the phone held on 17th of this month . However the euphoria of booking this phone suffered as the web site for online booking crashed on the very first day. Moreover experts have raised questions about the real possibility of having a smart phone at such a cheap price. Indian Cellular Association president Pankaj Mohindroo said that this pricing is not possible under any circumstances, even if the components are made in India. Despite the fact that the relevant web site did not function for two days , the company in its latest statement has claimed that it has already received 50 million registrations and is therefore thinking in terms of stopping the registration process.
In some other miscellaneous developments during the week, the government has decided to launch a platform known as National Agricultural Market through which all the farmers in the country can sell their farm yield to any of the five hundred agricultural mandis in the country. The platform will be launched by the prime minister on 14th April this year. Employee Provident Fund organization EPFO has raised the rate of interest on PF savings from 8.75 percent to 8.80 percent. Mr. U K Sinha , the Chairman of Securities and Exchange Board of India , who was due to retire on 16th February at the age of 63 was given an extension of one year and was asked to continue as the Chairman.
On the macroeconomic front , Indian exports fell to 21.07 billion dollars which is a reduction of 13.6% . However the imports were also reduced considerably and the trade gap therefore narrowed to an eleven month low. Indian economy will continue to see robust growth at 7.4 per cent in the next financial year in terms of a report of Paris based think tank “The Organisation for Economic Cooperation and Development” (OECD) published during the week and it  has raised India’s growth forecast compared to 7.3 per cent expansion projected in November 2015. For other macro economic reforms to take effect ,budget proposals are being watched keenly both at the international as well as domestic level .Many experts believe that the Finance Minister on account of  very high spending pressure because of increased expenditures on account of  pay revision salaries and One rank one Pension may settle for a wider fiscal deficit of 3.8 as against 3.5 proposed earlier and it may be then all the more difficult to meet the fiscal deficit target of 3 in the FY 2018. Whereas impact of higher fiscal difference numbers may be positive on growth from a short term point of view but in the longer term it could hurt the growth. The speakers at the IIFL Global Investor’s Conference which started during the week  were unanimously emphatic that India will outperform global markets in the next few years, whereas on the contrary, the United Nations in its report “ World Economic Situation and prospects 2016  has said that the developing countries are heading for a major slowdown this year and they will grow at an average rate of 3.8% only.
In an important international development, The International Monetary fund has appointed Christine Lagarde  as a managing director for a second term up to 2021.

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