Seven steps by Raghuram Rajan that propelled Sensex above 19,000 in ET

Benchmark indices reclaimed their key levels in trade on Thursday, a day after Dr. Raghuram Rajan took charge as the new Governor of the Reserve Bank of India (RBI).

Raghuram Rajan, who is the second-youngest RBI governor, announced a slew of measures to restore confidence among investors in the India growth story. The governor emphasised on a push for more international settlements in rupees and further liberalization of our financial markets.

Benchmark indices opened with a gap-up, and the Sensex rallied about 550 points in intraday trade on Thursday. The S&P BSE Sensex reclaimed its crucial psychological level of 19000 in intraday trade, led by gains in banks, realty and consumer durable stocks.

The 50-share Nifty index also managed to hit its crucial psychological level of 5600 in trade today, to post its biggest percentage gain since August 16.

In his (Raghuram Rajan) first press conference yesterday, he made major announcements relating to banks, with a view to accelerating long-pending reform issues. Dr. Rajan mentioned that these steps would be undertaken in the coming months.

"The steps may not alleviate immediate stresses, but some - branch licensing, priority sector lending (PSL) and statutory liquidity ratio (SLR) reduction - will have a major long-term impact on bank profitability and growth," JP Morgan said in a note.

The rally in benchmark indices was led by smart rally in banking stocks. CNX Bank Nifty rallied over 9 per cent in morning trade to post its biggest percentage gain since May 2009.

The BSE Banking index was also the top gainer among the sectoral indices listed on the Bombay Stock Exchange. The index finally ended 9.3 per cent, followed by the BSE Realty index which was up 5.4 per cent and the BSE Consumer Durable index rallied 4.5 per cent.

The 50-share index ended at 5,592.95, up 144.85 points or 2.66 per cent. It touched a high of 5,625.75 and a low of 5,552.70 in trade today.

The S&P BSE Sensex closed at 18,979.76, up 412.21 points or 2.2 per cent. It touched a high of 19,117.52 and a low of 18,847.02 in trade today..

Morgan Stanley slashes Sensex target to 18,200

 American brokerage Morgan Stanley today slashed its Sensex target for the next 12 months to 18,200, citing weakening macro fundamentals of the economy.

"We cut our Sensex earnings growth estimates from 10.5 per cent to 4.1 per cent for this fiscal and from 19 per cent to 12.7 per cent for the next. The new 12-month forward Sensex target is 18,200. Given the tail risks, we underscore our bear case-- a 14 per cent fall in the Sensex with a 35 per cent probability," Morgan Stanley India head Ridham Desai said in a note.

Citing the weakening macro fundamentals for the downgrade, Desai said: "We are trimming our broad market earnings growth forecast for FY14 to -6 per cent from 12 per cent and introducing an estimate of 5 per cent for FY15.

On the triggers for the market, he said that signalling has been a key issue for the market and said "the RBI needs to reaffirm that high rates will linger and the government needs to endorse fiscal consolidation."

He also warned that without credible policy measures, the market will be punitive with prices, especially the rupee forcing macro rebalancing.

Equating the equity valuation template to the 1998 levels, he said a negative gap implies the market is not cheap though the P/B is in its bottom decile.

"The market is pricing in a six month forward of 9 per cent nominal IIP growth and a -5 per cent one-year forward earnings growth offering a 5.8 per cent risk premium.

For the domestic market, the key problem is that the US yields will keep real rates here higher for longer at a time when growth is already slowing, he concluded.

Sensex poised for 23,000? Analysts speculate on fair value By ECONOMICTIMES

Over 6 per cent slide in the value of the S&P BSE Sensex so far in 2013, as per data till September 3, is making analysts speculate the base case - or what is called the fundamental value of the index.

So far in the year, the index was largely weighed by a host of factors including uncertain macro-economic environment, depreciating rupee, concerns over US Federal Reserve's winding down of its $85-billion bond-buying program and geo-political concerns.

Estimates on Sensex are mixed and analysts expect the benchmark index to move in a 5000-point range, from 18000 upto 23000. Morgan Stanley is of the view that earnings growth of Sensex companies are likely to take a hit in FY14 and FY15.

"We cut our Sensex earnings growth estimates from 10.5% to 4.1% for FY14 and from 19.0% to 12.7% for FY15. We issue a new 12-month forward Sensex target of 18200," Morgan Stanley said in a report. Amid expectations of a slowdown in economic growth, the brokerage has trimmed its broad market earnings growth forecast for FY14 to 6% from 12% and forecast an estimate of 5% for FY15.

Sensex outlook by Morgan Stanley: Bears, 15700; bulls, 23800

Key macro-economic data showing signs of slowdown amid global concerns construct a challenging environment for Indian equities, says Morgan Stanley in a report released earlier today.

For Indian markets, the key problem is that US yields will keep real rates in India higher at a time when growth is already slowing down. Adding to it are concerns over US Federal Reserve winding down its bond buying program as early as the end of this month.

Amid expectations of a slowdown in economic growth, Morgan Stanley has trimmed their broad market earnings growth forecast for FY2014 to 6% from 12% and introducing an estimate of 5% for FY2015.

"We cut our Sensex earnings growth estimates from 10.5% to 4.1% for FY2014 and from 19.0% to 12.7% for FY2015. We issue a new 12-month forward Sensex target of 18200," added the report. Our key advice to investors is to remain underweight on banks and overweight USD hedges, the note said.

Given the tail risks, the global investment bank underscores its bear case and sees a 14 per cent fall in the Sensex, with a 35 per cent probability of 15,700.

GDP growth may slip below 1-2% if CAD halves: Jefferies

A fall in the current account deficit to $30-$50 billion, or about half of current levels, has the potential to reduce India's GDP growth rate to 1-2 per cent, Jefferies wrote in a note.

Jefferies argued that the CAD compression can have a similar negative economic impact such as monetary or fiscal tightening, by the impact that falling imports, which it estimates account for nearly 16 per cent of India's economy, can have on domestic demand and employment.

"We maintain that India's GDP growth is headed for a far steeper decline than the already muted expectations, as the impact of the currency/CAD-related damage has barely started," analysts at the investment bank wrote.

Unravelling rupee’s real moves :: Business Line

The rupee is in a free fall against the dollar since the beginning of this year, losing 16 per cent. This rate that is tracked by everyone is the nominal exchange rate that includes changes in value of the rupee due to changes in prices of goods and services within the country.

The picture is however somewhat different, when we look at the real effective exchange rate (REER), a metric used to gauge the real value of the rupee.

Like any other ‘real’ measure, the REER gives the value of the rupee (relative to a basket of currencies) that is devoid of the influence of inflation. The rupee has fallen 5 per cent, according to this metric, till July this year.

The RBI releases monthly data on 6 – country and 36 – country REER indices.

These are countries with which India has trading ties.

The index is a weighted average of the bilateral exchange rates (for instance, rupee–dollar, rupee–yen and so on) adjusted for differences in inflation between India and the other country.

Each of the bilateral exchange rate is weighted by the respective country’s share in India’s trade.

What does the REER indicate? This index shows the external competitiveness of the country.

A rise in the index indicates appreciation of the rupee relative to other currencies and vice versa.

While the nominal exchange rate is determined by the demand and supply of currencies relative to each other, the REER goes a step further by also adjusting for inflation that erodes a currency’s purchasing power.

Even as depreciation of the rupee would make Indian goods cheaper (improving our external competitiveness), a higher inflation relative to other countries would negate a part of that.

When the REER is at a value of 100, the rupee is said to be rightly valued. When the index dips below 100, the currency is undervalued in relation to its trading partners.

Similarly, value above 100 means the rupee is overvalued and needs to decline in value.

The sharp correction in the rupee since this May has made the currency heavily undervalued in relation to its trading partners.

This is reflected in the July REER index that is at 88.

This is the lowest value since April 1993. Much lower index values were seen only during the first part of the 1990s.

The index averaged 67 and 64 in 1991 and 1992 respectively. Since then, the index has fluctuated within a band of 90 to 100.

More recently, the index averaged 93 in 2009 going up to 100 in 2010 and 2011 to return to 93 in 2012.

SBI Bluechip - Right sector choices :: Business Line

Gloom and doom view on Indian economy overdone: Raghuram Rajan By ECONOMICTIMES

While acknowledging that the country faces challenges, Raghuram Rajan, RBI Governor on Wednesday assured that Indian economy remains fundamentally strong. Addressing the media soon after taking charge at RBI, Rajan said, "This is not an easy time to take charge as RBI Governor."

Rajan said that while the primary objective of the central bank remains monetary stability, inclusive growth & development and financial stability also form part of RBI's role. "The financial markets are volatile, there is domestic uncertainty," he said. "The central bank should never say never," he added.

Rajan emphasised the need on transparency, predictability in RBI's policy making. "RBI should be a beacon of stability as to its objectives," he said. There is a need for faster & broad based inclusive growth, he added.

Rajan went on to say that even as growth from large companies has slowed down, rural areas have been contributing to the economy. "RBI can accelerate financial development through inclusion," he said.

Answering reporters, Rajan said that the gloom and doom view on the Indian economy is overdone.

On the issue of new bank licences, Rajan said that a committee led by Bimal Jalan will screen bank licences. "We hope to announce new licences by January 2014." he said.

Rajan will make his first monetary policy statement on September 20.

Raghuram Rajan took over as the new Governor of the RBI. Rajan, 50, an economics professor who also served as chief economist at the International Monetary Fund, took charge from D Subbarao.

The duo shook hands warmly and hugged after Rajan signed papers taking over as the 23rd Governor of the central bank.

"Ten minutes ago, I handed over charge to Raghuram Rajan," Subbarao said after stepping out of Mint Road. "The country could not have asked for a more capable person to lead the RBI in these most difficult times."