RBI’s Operation Twist? Not quite :: J.P. Morgan Securities LLC

RBI’s Operation Twist? Not quite 

The RBI last night announced a series of measures to try and mitigate the collateral impact arising from the interest rate defense over the last month. Specifically, rising-long term yields have created significant disquiet in markets as they threaten to further pull-down growth, increase the government’s borrowing costs and further imperil the fisc, and increase mark-to-market losses on banks’ portfolios. To mitigate these impacts, the RBI signaled they will resume OMO purchases to contain long term yields. In addition, the central bank announced a series of measures to help banks’reduce and spread out their mark-to-market losses from the hardening of yields. All this was understandable and not inconsistent with the interest rate defense. But what surprised markets is that the central bank indicated that the “the immediate objective of raising the short-term interest rates has substantially been achieved.” Markets took this to mean that further increases in the penal MSF rate are effectively off the table. The central bank also announced it would potentially scale down the issuance of short-dated instruments to soak out liquidity, implying that short rates remain near the MSF rate but are not substantially higher. Some have characterized the RBI’s move as Operation Twist, keep short rates high and try to push down long term yields. But this is no Operation Twist. Instead, the entire yield curve has gapped down 50-70 bps, with short rates falling as much and, in some cases, even more, reflecting a significantly reduced probability of more monetary tightening. Prima facie, one would have thought this latest round of measures would have excited the equity market which, in turn, would prop up the currency. Instead, equity markets declined by a whopping 2% today. That contributed to USD/INR down weakening another 1.4% which touched another all-time low intra-day. Why do expectations of the Rupee matter so much for the BoP? Because, contrary to public perception, this is not a current account problem anymore. The estimated monthly CAD plunged to just over $2 bn in June and July vis-à-vis $10 bn the previous two months. The combination of gold imports plunging and exports picking up have all but squeezed the CAD the last two months. But India was unable to even finance a CAD of $2.5 billion per month over the last two months. Instead, reserves had to finance the entire CAD in June and July with estimated net capital inflows close to 0. So this is not a CAD problem any more. It’s squarely a capital inflow problem. Why? Isn’t the Rupee cheap at current levels? The Rupee is only cheap if you believe it is not going to become cheaper (similar to what deflation does to postponing consumption). As long as the rupee continues to weaken, it will be hard to attract even capital flows that ordinarily would have entered. As such, ensuring a semblance of Rupee stability for a few weeks must be policymakers only priority for the time being. And that is why it’s critical that the interest rate defense not be diluted or undermined in the bid to lower long-term yields. It’s all very well to mitigate the collateral damage. But given the challenging global macro and the Rupee 4% fall over the last week, let’s not throw the baby out with the bathwater.

CLSA: Technicals; Nifty and Currency (Rupee)

The Nifty’s technical structure has deteriorated further following the break below 5,500 support. This breakdown ends over 10-months of ranging price action and provides us with a downside target of 4,916, the width of the old trading range project from the old support level at 5,500. Below this measured move next chart support is at the 4,537-4,700 area which includes the 2010 and 2011 lows. On the currency side the Rupee continues to work its way higher following the breakout from the 2012-2013 triangle consolidation pattern. The recent break above the July 2013 highs opens the door for further weakness towards next chart resistance at the 67-68 area.

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When the taxman comes knocking :: Business Line

Tax Talk :: Business Line

I am a salaried employee. I took a housing loan from a public sector bank and constructed a dwelling house in a plot owned by my mother. I am the only child and none of us (father, mother and me) own any other house or land. In this regard, am I eligible for income tax benefits in respect of the housing loan (on interest as well as repayment amount)?

- Roy Paul

In the instant case, it is assumed that the cost of construction of the house property has been borne by you and the house (including piece of land) is registered in your name also.

In that case, you may be eligible to claim income tax deduction in respect of interest payable on housing loan as well as principal repayment.

Actual facts and circumstances of the case should be examined before drawing any conclusion.

It should be noted that in case of a self-occupied house property, the maximum deduction of Rs 1,50,000 per annum can be claimed in respect of interest payable on housing loan, provided the construction of the property has been completed within three years from the end of the financial year in which the loan was borrowed.

The deduction in respect of principle repayment is covered within the overall limit of Rs 1,00,000 prescribed under section 80C of the Income-tax Act, 1961.

I am a salaried employee and earn Rs 4.32 lakh annually. In June 2013, I got 500 grams of gold ornaments as ancestral property. I want to sell them now to repay my home loan of Rs 9.5 lakh. The gold jewellery of my ancestors/parents is not in any income tax records. Is it possible to sell these ornaments and pay capital gains tax?

- Akash

Under the Income-tax Act, 1961, jewellery is considered as a capital asset, subject to capital gains tax.

If it is held for more than 36 months before the transfer, the nature of capital gains would be long-term (subject to indexation benefit), else short-term, if held up to 36 months.

It is pertinent to note that in case a capital asset has been acquired through inheritance as in the instant case (being ancestral property), the period of holding of the previous owner should also be considered for determining the nature of the capital gains i.e. whether the same will be long term or short term.

In case of a long term gain, indexation benefit is available. Further, in case of inherited capital asset, the cost of acquisition for the purpose of calculating capital gains tax should be the cost to the previous owner.

(The author is a practising chartered accountant)

ML :: India Equity Strategy : Addressing 3 investor questions post drop in markets

3
rd Largest 1day market fall in 4 years: what now?
The market had its 3rd largest 1 day fall in 4 years falling 4% largely on fears that
India would impose capital controls on repatriation of money by FIIs. We think this
is unlikely since the policy makers realize the negative impact this would have on
flows into the country. So is this a buying opportunity? Tactically most of our
indicators show that it is better to wait for a further correction or some signs of
stability in the currency before buying India.
#1: Is India oversold? Not yet but approaching there
„ The market has fallen 4% on Friday. But a large part of it was reversal of the
gains of the previous few days. Overall, for the week the market fell only 1%.
„ Our analysis of past major falls indicates a mixed trend. Only in 54% of the
instances have markets given a positive return over next 1 month.
„ Based on our fund manager survey, sentiment on India is at a lower end of
last 12 month trend but not yet at extreme bearishness levels.
„ Technical indicators including RSI, 200 DMA are getting close to but are not
yet at over-sold levels.
#2: What will improve sentiment on India? The currency
„ The single biggest factor making investors nervous on India is the currency. A
stabilization of the currency would make us as well as investors more positive
on India. While the Govt has taken a series of steps to stabilize the currency,
it has not worked partly due to nervousness on the Fed tapering. Even after
the start of these measures, India is the 3rd worst performing currency
amongst EMs.
„ Based on past history, the markets give an average return of near 11% over
3 months once currency stabilizes. Given the negative sentiment in India
currently, we see a possibility of something similar this time too. An increase
in fx reserves by raising fx bonds accompanied by low trade deficit data could
help stabilize the currency over next few weeks.
#3: Do we continue to buy the high quality, outperformers?
„ While we are getting tempted to nibble at some of the under-performers in the
banking space, near term we continue to stick to stocks in the pharma, IT and
telecom space. Hero Honda is our non-consensus pick.
Top Buys: Lupin, Idea, Hero Honda, TCS

MS :: India Strategy : How Do We Know When the Market Has Troughed?

How Do We Know When the Market Has Troughed?
Capitulation upon us: The steep fall in the Nifty raises the question whether this is the time to buy. Fundamentals will likely trail share prices, as they usually do. Valuation and sentiment indicators are the key. No doubt, some of the sentiment indicators we track appear to be reaching oversold territory and at some point in the next few Nifty points and few days, the market is likely to rally. However, until the fundamental construct remains the way it is - we think this is will be a rally to sell, not buy. We remain cautious on banks and overweight US$ hedges from a portfolio perspective.

What are the indicators saying? The indicators are not universally in buy territory. While our market-timing indicator is in buy zone, one of its key components - our proprietary composite sentiment indicator - still has some distance to cover to reach oversold zone. Of this indicator's constituents - namely, flows, momentum, breadth, volatility, and positioning - only breadth and positioning suggest market capitulation. Flows, momentum and volatility portend further downside.

What to track for a fundamental turn: The key valuation metric, as we have argued since the RBI lifted the short rates, is the modified earnings yield gap (trailing earnings yield minus short-term yields). This metric tells us that the market is not cheap, yet. The P/B is 5% from its bottom decile, from where losing money is a rarity but it does not mean that the market does not remain there for an extended period. The most positive indicator for the market is the state of downward earnings revisions - this has reached a buy level. From a macro perspective, it is all about when short rates retract, which is hinged to US yields - not a pleasant situation for equity investors. Policy makers can trigger rallies from time to time by either resorting to subsidy reduction (steep hike in diesel prices) and/or raising foreign capital. The markets could also respond to better growth trends in China or stabilization in EM - however, these are unlikely to create a new bull run. 

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