Tuesday, January 29, 2013
Inflation is likely to moderate below the Reserve Bank’s baseline projection of 7.5 per cent. However, suppressed inflation continues to pose a significant risk to the inflation in 2013-14. As some of the risks materialises, inflation path may turn sticky. The Reserve Bank of India released the Macroeconomic and Monetary Developments Third Quarter Review 2012-13. The document serves as a backdrop to the Third Quarter Review of Monetary Policy Statement 2012-13 to be announced on January 29, 2013. Highlights: Overall Outlook Balance of macroeconomic risks suggests monetary policy needs to be calibrated in addressing growth risks as inflation turns sticky Growth in 2012-13 is likely to fall below the Reserve Bank’s baseline projection of 5.8 per cent. However, output gap may start closing in 2013-14 although at a slow pace on the back of some revival in investment and consumption demand. Inflation is likely to moderate below the Reserve Bank’s baseline projection of 7.5 per cent. However, suppressed inflation continues to pose a significant risk to the inflation in 2013-14. As some of the risks materialises, inflation path may turn sticky. Various surveys show that business confidence remains subdued. Survey shows that forecasters outside the Reserve Bank anticipate growth to recover from 5.5 per cent in 2012-13 to 6.5 per cent in 2013-14. Average WPI inflation is expected to moderate from 7.5 per cent in 2012-13 to 7.0 per cent in 2013-14. Global Economic Conditions Unconventional monetary policies reduce stress, but risks remain ahead Fiscal risks are likely to keep global recovery muted in 2013. While the immediate risk of the fiscal cliff in the US has been averted, risks to global growth emanating from euro area remain significant. There are some signs of growth bottoming out in Emerging Market and Developing Economies (EMDEs). Global inflation scenario may stay benign as demand in advanced economies (AEs) remains weak. Improved supply prospects in commodities like oil and food are likely to restrain commodity price pressures. However, upside risks persist, with possible recovery in EMDEs and large quantitative easing in AEs. Indian Economy Output Growth slowdown continues, revival may take some more time Growth slowdown in India continues with growth remaining below potential for the fifth successive quarter. Policy initiatives of the government are yet to show up fully or definitively in data. Revival may take some more time. Rabi crop is expected to be normal despite deficient rains, but is unlikely to fully compensate for kharif deficiency. Sowing under rabi crop has been broadly the same as the level in the previous year. Weak industrial performance is likely to persist. Subdued external demand and lack of reliable power supply amidst coal shortages are constraining capacity utilisation. Lead indicators of service sector and the Reserve Bank’s Service Sector Composite Indicator signal moderation. The Reserve Banks’ Order Books, Inventory and Capacity Utilisation Survey shows capacity utilisation increased marginally in Q2 of 2012-13. On a sequential basis, new orders moderated in Q2 of 2012-13. Aggregate Demand Improvement in investment climate is a prerequisite for economic recovery Demand conditions remained tepid, with private consumption continuing to decelerate and with investment yet to recover. Investment intentions in new projects improved marginally in Q2 of 2012-13, but investment is held back by project delays. Coal supply issues facing power sectors are yet to be fully resolved. Road investments have stalled due to issues relating to environmental clearances, land acquisition and financial closures. Sales growth moderated further in Q2 of 2012-13 to its lowest level in three years, but net profit growth improved markedly. Early results for Q3 of 2012-13 indicate continuation of the trend of sluggish sales. Quality of fiscal adjustment remains a concern, even as fiscal risks have reduced in 2012-13. Government is working towards achieving revised fiscal deficit target of 5.3 per cent of GDP by restricting both plan and non-plan expenditure during the last quarter of the year, even as significant shortfall in tax revenue is likely. Increased public investment to crowd in private investment along with removal of structural impediments that is slowing private investment is needed to pull the economy out of the current slowdown. External Sector Widening of CAD and its financing remains a key policy challenge Widening current account deficit (CAD) has emerged as a major constraint in easing monetary policy. With the likelihood that CAD/GDP ratio may exceed 4 per cent of GDP for the second successive year in 2012-13, prudence is necessary while stimulating aggregate demand. The CAD/GDP ratio reached its highest ever peak of 5.4 per cent of GDP in Q2 of 2012-13. Early indications are that it may increase further in Q3 of 2012-13. CAD has widened mainly due to worsening trade deficit. Weak external demand alongside structural bottlenecks has led to contraction in exports of India as also of other EMDEs. In addition, continuing large imports of oil and gold has resulted in deterioration in India’s trade balance. Strong capital flows have facilitated financing of CAD, resulting only in marginal draw down of reserves. While increased FII debt investment limits may enhance inflows, they do not provide a solution to CAD financing on a sustainable basis. Monetary and Liquidity Conditions With moderating inflation, Reserve Bank takes measures to infuse liquidity Since the start of 2012, the Reserve Bank has worked towards easing monetary and liquidity conditions in a calibrated manner without jeopardising moderating inflation. With consequent moderation in inflation, the Reserve Bank took measures to combat tight liquidity conditions. Liquidity conditions tightened in Q3 of 2012-13 due to build up of government cash balances and strong currency demand. The Reserve Bank resumed outright open market operations (OMOs). In 2012-13 so far, it has infused liquidity of `1.3 trillion through outright OMOs. Broad money growth remains below indicative trajectory. Deposit growth has decelerated, while credit expansion has been in line with the trajectory. Even as asset quality concerns have impacted credit expansion, the increased wedge between deposit and credit growth remains a concern. Financial Markets Reforms and inflows improve market sentiments and revive the IPO market Improved global liquidity and recent policy reforms have aided FII inflows, leading to a turnaround in equity markets and revival of the Initial Public Offering (IPO) market. Rupee remained largely range-bound in Q3 of 2012-13. Money market remained stable despite liquidity deficit. G-sec yields softened markedly since December 2012 on expectations of no additional government borrowing and policy rate cut, as also resumption of OMOs and deferment of an auction. The Reserve Bank’s House Price Index (HPI) increased by 3 per cent quarter-on-quarter in Q2 of 2012-13 alongside increase in transaction volumes. Price Situation Headline and core inflation moderated, but suppressed inflation poses risks Headline inflation moderated in Q3 of 2012-13 with significant moderation of core inflation, but CPI inflation edged up to double digits. Core inflation pressures are unlikely to re-emerge quickly on demand-side considerations. Near-term inflation outlook indicates that the moderation may continue in Q4 of 2012-13. Wage inflation remains a source of concern. Rural wage inflation declined marginally but remained high at 18 per cent. In organised manufacturing, increases in staff costs remained in double digits. Going forward, risks remain from suppressed inflation, pressure on food prices and high inflation expectations getting entrenched into the wage price spiral. The inflation path for 2013-14 could face downward rigidity.
The anxiety among the market participants was clearly evident as they preferred to stay on the sidelines ahead of the RBI monetary policy scheduled to be held on 29th January, 2013. Benchmark indices were stuck in a narrow trading range throughout the day. However, the interest rate sensitive stocks like the Banking, Auto and the Realty were in demand anticipating a rate cut. Even the IT and select telecom stocks witnessed some buying. The Mid-Cap index remained subdued, while the Small-Cap index marginally gained by 0.3%. Finally, BSE Sensex closed flat at 20103. It had earlier touched a day's high of 20172 and a day's low of 20062. It opened at 20129. The NSE Nifty closed unchanged at 6,075. It earlier touched a day’s high of 6,088 and a day’s low of 6,061. It opened at 6,082. Wipro, TCS, ICICI Bank, Hero MotoCorp, Coal India, Dr Reddys Lab, HDFC, Bajaj Auto, Tata Motors, Hindalco, ITC, Mahindra & Mahindra were among gainers in Sensex and Nifty. RIL, Infosys, NTPC, ONGC, L&T, Sun Pharma, Bharti Airtel, BHEL, Jindal Steel, SBI were among losers in Sensex and Nifty. The INDIA VIX on NSE was up 3% to end at 15.15. It hit a day’s high of 15.49 and day's low of 14.41. Stocks which hit 52 week high during the week were Hinduja Vent, Kinetic Engr, Satyam Comp, Bombay Cycle, and Jolly Board. Stocks which hit 52 week low during the week were Andhra Petro, Bajaj Hind, Parrys Sugar, Industrial Invest and TechNVision Vent. Shares of Reliance Infra ended lower by 2.5%. The company posted a profit after tax, Share in Associates and Minority Interest of Rs7279.40mn for the quarter ended December 31, 2012 as compared to Rs4083.2mn for the quarter ended December 31, 2011. Shares of JSW Steel gained by 0.5% and closed at Rs869. The company posted a net profit after tax of Rs1367.30mn for the quarter ended December 31, 2012 as compared to Rs1682.40mn for the quarter ended December 31, 2011. Shares of Jet Airways erased early gains and ended lower by 2%. Reports stated that the company may finalise deal with Etihad in February. The stock closed at Rs600, down Rs11.35. Shares of Maruti Suzuki edged higher by 0.5% after reports stated that the company has purchased land in Gujarat for its fourth plant, with a view to roughly doubling annual production capacity to about 3 million units. The stock closed at Rs1608, up Rs8.75. Shares of Reliance Industries declined by 2% after reports stated that oil & gas major and its partner BP plc's KG-D6 gas fields and gas discovery area NEC-25 are among 14 oil and gas blocks that have been declared "No-Go" areas by the Defence Ministry. The stock closed at Rs895, down Rs16.10. Most Asian markets ended with gains on Monday following overnight gains in the US markets. However, the Nikkei index in Japan ended with losses from near 3 year highs on account of profit booking. The index declined by 1%. Among the top gainers were, the Shanghai Composite index in China rose by 2.4%, the Taiwan index rose by 0.6%, the Hang Seng index in Hong Kong gained by 0.4% and the Straits Times added 0.2%. The European equity markets were trading in a tight trading range. The FTSE index in UK was almost unchanged, the CAC index in France and the DAX index in Germany were trading marginally lower by 0.2% each.
On February 9, 2013, the equity and equity derivative segment of MCX Stock Exchange (MCX-SX) will be launched by Finance Minister P. Chidambaram. Adding further, MCX-SX got 700 applications for new membership out of which 270 membership applications have already been registered by Securities and Exchange Board of India ( SEBI). The company said in a statement that MCX-SX will start live trading two days later from February 9. On December 19, 2012, MCX-SX got 'commencement certificate' for trading in new segments such as equity, futures and options on equity, interest rate derivatives and wholesale debt market by SEBI. Further, on December 21, 2012, the ministry of corporate affairs had granted the status of a 'recognized stock exchange' to MCX-SX. In today's trade, MCX closed at Rs1411.55, up by 3.44%, with a volume of 0.33 lakh shares on the BSE.
Key benchmark indices settled flat ahead of the Reserve Bank of India (RBI)'s Third Quarter Review of Monetary Policy 2012-13 tomorrow, 29 January 2013. The barometer index, BSE Sensex, settled at 20,103.35, off close to 70 points from the day's high and up about 40 points from the day's low. Index heavyweight and cigarette maker ITC rose marginally. Another index heavyweight Reliance Industries (RIL) extended intraday losses in late trade. The market breadth, indicating the overall health of the market, was positive. The Sensex has risen 676.64 points or 3.48% in this month so far (till 28 January 2013). From a 52-week low of 15,748.98 on 4 June 2012, the Sensex has surged 4,354.37 points or 27.64%. Coming back to today's trade, interest rate sensitive automobile and realty stocks rose as the Reserve Bank of India (RBI) is seen cutting its key policy rate viz. the repo rate by 25 basis points (bsp) at Third Quarter Review of Monetary Policy 2012-13 tomorrow, 29 January 2013. Reliance Infrastructure (RInfra) edged lower as an exceptional one-time profit of Rs 418.34 crore on sale of shares of Reliance Power lifted the company's bottom line in Q3 December 2012. Adani Power dropped as the company's net loss widened in Q3 December 2012 over Q3 December 2011. Adani Ports and Special Economic Zone surged after the company's board of directors gave in-principle approval to divest the company's significant stake in entities controlling the Abbot Point Coal Terminal in Queensland, Australia to the Adani family.