WEEKLY ROUND UP
Global update
• German Chancellor Angela Merkel, in the meeting of four largest Euro zone members – Germany, France, Spain and Italy –
held last Friday, reiterated her opposition to Italy’s proposal of using the bailout funds - EFSF or ESM - to buy sovereign
bonds. Merkel also confirmed her opposition to directly recapitalizing banks.
• In a surprisingly positive development in the EU Summit on Jun 28-29, the leaders have agreed to form a single
supervisory body for banks and allow them to be recapitalized directly using the bailout funds, without adding to
Government debt. Moreover, the countries complying with the EU budget policies would get access to the EFSF and ESM
to gain stability in their bond markets. Meanwhile, Italy and Spain refused to sign off on a EUR 120 bn growth package
until Germany approved short-term measures to ease their cost of credit
India Update
• The measures taken by RBI to stem rupee's fall included increase in the FII limits in bonds to USD 20 bn from USD 15 bn
and extending the limit on ECB borrowings by USD 10 bn for manufacturing and infrastructure sector companies. The RBI
also allowed qualified investors to invest in mutual fund schemes that hold at least 25% of their assets in the
infrastructure sector.
• Prime Minister Manmohan Singh who has also taken over the mandate of a Finance Minister asked officials to formulate
an economic revival plan in part addressing problems in tax policy. Meanwhile, the CBDT released draft guidelines for
GAAR, which said that the rule will not be invoked in case of non-resident investment of FII. Further, the capital market
transactions are also entirely exempted from GAAR provisions.
• Government panel recommended major changes in Diesel subsidy including fixed diesel subsidy and cut in custom and
excise taxes. Indian state run oil marketing companies, on Thursday, decided to cut petrol price by INR 2.46/litre, which
came into effect from Thursday midnight as international oil prices fell to their lowest level since December 2010.
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MARKET UPDATE
Global Markets Overview
• US stocks fell on Monday despite positive
domestic data releases, as markets grew less
optimistic that the EU summit scheduled on
June 28-29 would be able to deliver concrete
policy actions to tackle the Euro zone debt
crisis. Financial and Energy stocks gained in
the week and US stocks rose amidst upbeat
data prints from US. US stocks traded lower
amidst looming concerns over the Euro zone
debt issue after the leaders in the EU summit
failed to chalk out a concrete action plan. Dow
Jones ended the week in negative territory.
• Asian stock markets opened the week in red as markets remained focused on the Euro zone debt crisis. Asian stock
markets traded lower amidst a slew of bank downgrades in Spain by the Moody’s and firmed tracking overnight cues
from the Wall Street on account of upbeat data prints from US. Asian stocks surged owing to rebound in risk appetite
following upbeat comments from European Council President Rompuy, surging around 2% for the week.
Domestic Equity Market Overview
Indian stock markets opened the week firm and reversed their gains as the widely awaited measures taken by the RBI to attract
capital flows fell short of market expectations. Indian stock markets edged up in a volatile trading session ahead of the expiry of the
June derivatives series EU summit scheduled later in the week. However, Power stocks gained as the Delhi Electricity Regulatory
Commission (DERC) announced a 26% increase in power tariff for all domestic consumers with effect from July 1. Meanwhile, the
automobile sector was negatively impacted as markets anticipated government panel's recommendations of major changes in
Diesel subsidy. Domestic equities received some support as the Prime Minister Manmohan Singh also took over the mandate of a
Finance Minister. Recovery in risk sentiment following upbeat comments from EU leaders provided stronghold to the domestic
stocks with Sensex closing 2.62% higher for the week. Foreign institutional investors bought equities to the tune of USD 148 mn in
June as against a net sale of USD 273 mn in May
Fixed Income
Indian Government bonds commenced the week on a firm note
and optimism that RBI would announce measures to stem the
downside in the Rupee further aided the gains. However, gilts
pared gains in subsequent trade as the market deemed the steps
announced by the RBI as inadequate. Indian Government bonds
traded in a narrow band with a bearish bias amidst uncertainty
over RBI’s open market operations this week. The supply of fresh
debt (auction of dated securities worth INR 150 bn) scheduled on
Friday also weighed on the sentiment. Drop in crude oil prices
aided demand for gilts. However, the slow progress of the
monsoon does not bode well for the markets, as it would mean
lower growth and higher inflation.
USD-INR
Indian Rupee strengthened by 2% in the week. The Rupee
opened firm this week at 56.74 amidst speculation of
proactive steps to be taken by the RBI to attract capital
flows but it reversed its gains later in the day as the
announcement failed to meet market expectations.
Month end Dollar demand by importers also weighed on
the currency while Dollar sales by exporters provided
some support. PM's direction towards much needed slew
of reform and EU leaders agreement on a deal to stabilize the region's debt market and recapitalize its banks provided succor to the
Rupee.
Oil
Crude oil prices fell amidst easing of supply concerns following reports that the tropical storm Debby shifted away from the oil rigs
in the Gulf of Mexico. Subdued market sentiment coupled with a stronger Dollar also weighed on prices. Prices remained under
pressure as the American Petroleum Institute reported that crude stockpiles rose last week as against an expected decline.
Meanwhile, the strike by platform workers in Norway leading to production cuts to the tune of 0.15 million barrels per day (mbpd)
in the region capped the downside in prices. Brent prices participated in the rally led by agreement of EU leaders to reduce
borrowing costs in the Euro region. Brent was last trading at USD 93.98 (15:40 IST), 2.57% higher for the week.
Gold
Gold prices opened the week lower in the back of broad based strength in the Dollar. Persistent Euro zone debt concerns and risk
aversion globally has somewhat aided the safe-haven demand for the bullion, which is likely to be capped amidst improvement in
risk sentiment following upbeat comments from EU leaders. Gold is trading 0.18% lower from last week's close. (15:40 IST)
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