Perspective on Markets

By Dipen Shah, Sr. Vice President, PCG Research, Kotak Securities:

Over the past week, Rupee was ranged between 59.90 and 60.50 levels on spot, against the US Dollar. Lack of major triggers and committed RBI kept the pair stuck within a tight range. FIIs were happy to sell the US Dollar, every time it ventured above 60.20/25 levels on spot. However, dips towards 60.00/59.80 was bought by the oil marketing companies and also state run banks, on behalf of RBI. Globally, data points were favourable for the US Dollar, as various regional manufacturing surveys beat estimates and the US fed chairwoman painted a mildly hawkish view on the monetary policy. US Fed governor said that if the US job market show stronger improvement than anticipated then the central bank can consider hiking interest rates earlier and also at a pace that can be faster than currently expected. This comments gave a push to the US Dollar, which appreciated strongly against the Euro currency.

Indian Rupee remained locked in a tight range of 60.17/18 on spot and 60.32/33 levels. On one hand custodian banks, on behalf of their FII clients, continued to sell US Dollars. Inflows were noted both in debt as well as equity segments. Over the past two weeks, close 1.3-1.5 billion USD has flowed in but constant intervention from the central bank, either through state run banks or through oil marketing companies, has kept the pair bracketed. Over the week, there are no major events lined up from the domestic economy. Therefore, cues will appear either from the trend in equity and debt market or from the global risk appetite.

During the day there were comments from government officials that FII debt limit may be rejigged to allow for greater scope for foreign money into the debt markets. Currently, India allows FIIs of up to USD 30 billion in government bonds, including USD 20 billion for all and USD 10 billion for specific investors like foreign central banks, sovereign wealth funds, pension funds and insurance funds. There is a talk of tweaking the ratio to 25:5 from 20:10. As a result, we can expect a pickup in inflows once the tweaking occurs. However, MOF officials have indicated that overall FII investment limit in GOIsecs would not be hiked from USD 30 billion.

Over this week, traders need to keep an eye on the flash PMI data from France,Germany and US. Market is anticipating an improvement in the PM data in July. A better than expect number can continue to benefit the risk on mood in financial markets.

Technically, we expect a range of 59.70/60.00 and 60.45/60 on spot. With large OI build in the 60 strike July options, it appears that market seems to be playing a near about 60 expiry for the July series on the exchanges.

Some of the major developments seen in domestic and global economy:

• IMF raised Germany's GDP forecast for 2014 and 2015 to 1.9% and 1.7% respectively against earlier forecast of 1.7% and 1.6%.
  
  
• According to media reports, the new government has given environment clearance to five projects since it took charge on May 26. A total of 394 projects are still awaiting approvals from the ministry of environment, forests and climate change. These projects are worth over 2,570 crore.
  
  
• State-owned Oil and Natural GasBSE -0.61 % Corp (ONGC) wants government to resolve critical issues like fuel subsidy sharing and natural gas pricing before a planned USD 3 billion stake sale in the company to fetch better price. Commenting on the stake sale, ONGC wrote to the Oil Ministry saying any disinvestment at this stage may not realise the true potential/value of the company shares. ONGC's subsidy burden has increased from INR 44K crore to 56K crore between FY12 and FY14.
  
  
• India’s merchandise trade deficit widened in June and the services trade surplus for May shrunk. In June, India’s merchandise exports grew 10.2% y/y to USD 26.5 billion v/s 12.4% y/y that it clocked in May @ USD 28 billion. Robust growth was witnessed in exports of engineering goods and petroleum products. Imports grew by 8.3% y/y in June as against a contraction of 11.4% y/y in May. Bullion imports rose by 30% y/y in June, due to positive base effect and relaxation in the gold import norms. Over the month of May, bullion imports had declined by 72% y/y. Oil imports rose 10.9% y/y in June but sequentially it declined by 8.27%, inspite of an uptick in the global petroleum prices, reflecting a downswing in the domestic demand for petro products. Non-oil non-bullion imports rose by 4.4% y/y compared with 3.6% growth it clocked in May of this year. Merchandise trade deficit rose to USD 11.76 billion v/s 11.23 billion in May. Services data is released with a month’s lag. India's services exports in May rose by 8.8 percent to USD 13.9 billion while imports grew by 14.6% to USD 8.02 bn in May. As a result, net services exports came at USD 5.9 bn in May higher than USD 5.5 bn in April.
  
  
• According to the India Meteorological Department (IMD), the southwest monsoon has revived in parts of northwest and central India on Tuesday, bringing respite to people from heat and humidity but this has not totally erased fears of drought in some pockets. The weatherman says if the momentum generated by these showers is maintained in August, the drought fears will subside.
  
  
• With the decline in global crude oil prices continuing, oil marketing companies' (OMCs) losses on diesel sales has narrowed 27 per cent to Rs 2.49 a litre. Beside diesel, oil firms lose Rs 33.07 a litre on kerosene sold through the Public Distribution System and Rs 449.17 on LPG.
  
  
• In June UK employment surged to 73.1%, the highest level recorded since the financial crises. Despite the increase in employment wage growth slowed from 1.7% in May to 0.7% in June.
  
  
• To boost demand for infrastructure and housing, the Reserve Bank of India (RBI) on Tuesday said banks would not have to maintain cash reserve ratio (CRR) or statutory liquidity ratio (SLR) and will not have to meet priority-sector lending targets for funds raised through bonds for extending credit to these sectors. Under the new definition of affordable housing, loans of up to Rs 50 lakh in metros for houses valuing up to Rs 65 lakh and those of up to Rs 40 lakh for houses valuing up to Rs 50 lakh in all other cities are now part of affordable housing.
  
  
• China's gross domestic product rose 7.5% from a year earlier in the second quarter, up from 7.4% growth in the first quarter. Chinese industrial production rose more than expected at 9.2% in June from 8.8% rise in May. China’s urban fixed-asset investment rose to a seasonally adjusted 17.3%, from 17.2% in the preceding month.
  
  
• The government is considering hiking the FII investment sub-limit in bonds to USD 25 billion without disturbing overall USD 30-billion FII debt cap. Currently, India allows FIIs of up to USD 30 billion in government bonds, including USD 20 billion for all and USD 10 billion for specific investors like foreign central banks, sovereign wealth funds, pension funds and insurance funds. The limit under USD 20 billion has been almost fully exhausted.