Is RBI behind the curve ? :: HDFC Securities

Please Share::

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->
WTI Crude prices have tumbled again to below $56 a barrel Tuesday as OPEC refused to budge from its stand of scaling down of production. The UAE Oil Minister has gone ahead and further roiled the crude markets by further crystallising the stand by saying it will not cut production even if Crude falls to $ 0 a barrel!

The CPI has come in at 4.34% for November and the WPI is zero. That means no inflation.
The IIP on Friday had come in at -4.2%, which painted a very grim picture of the industry.
The Reserve Bank of India (RBI) is clearly behind the curve here.

The Rupee had weakened on Monday partly on FII sales and partly on expectations that a rate cut could be in the offing. The earlier the RBI cuts rates, the better it is. At least it will stimulate demand and cut costs for corporate. The Rupee could weaken further irrespective of the fact if the RBI cuts the rates or not. The Government has gone ahead and cut petrol-diesel prices further by Rs 2 per litre on Monday. This will further bring down inflation. That leaves no argument for the RBI to wait even a second longer.

The last time the wholesale price index (WPI) dipped briefly into negative territory was in July  2009. Then it was minus 0.3%. The Repo rate at that time was 4.75%. Currently, with WPI inflation at 0%, the repo rate is at 8%.

Though we may be comparing apple with oranges but there is no mistake in making the point that our sophisticated central bank is clearly behind the curve.

Fed meet begins today

Ironically, while our central bank has not yet begun to trim rates, the U.S. Fed may be readying to hike. While that may not happen before June 2015, it seems to be headed in that direction.

The Federal Open Market Committee (FOMC), the policy making arm of the U.S. Federal Reserve would begin its two day meet today later in the U.S. This meeting comes in the wake of tumbling crude oil prices. There is a general feeling in the markets that the U.S. Fed may recalibrate its stance on when it would start raising rates again in the U.S.

Fed-watchers anticipate the central bank to remove its longstanding pledge to keep interest rates at near zero for a "considerable time" in its Wednesday announcement. Economists then expect the first interest rate hike as soon as the second quarter of the next year after years at an artificially low level.

This feeling of inevitability may have been also contributed to the general weakness Monday in the U.S. markets.

No  Inflation (WPI)  in November

The reading for the WPI inflation for November came in at zero in November, indicating there was no inflation at all.

Inflation as measured by WPI dropped to 64 month low at 0.0% in November from 1.77% a month ago, mainly driven by a decline in food and crude prices. The market was expecting it to come at 1.1%.

Core inflation fell to 17 month low at 2.21% in Npvember from 2.50% reported in Oct-14.  Primary Articles Index contracted by 0.98% in November from 1.43% of previous month following the decline in food, non food and mineral prices. Food inflation fell by 0.39% M-o-M at 0.63% with vegetables contributing the most. Falling global crude oil prices drove fuel inflation down to -4.91 % in Nov (lowest since Oct 09) from 0.43 % of Oct.

Retail prices too cooled down sharply in November at 4.38% from 5.52% of previous month, dropping to its lowest since the government launched the consumer price index (CPI) in 2012.

Indian Rupee is the best currency : HSBC

HSBC thinks the Indian rupee will be the strongest among all the Asian currencies in 2015.

Lower oil prices should mean a persistent improvement in the current account and inflation. RBI is committed to lowering inflation expectations and now has the ability to curb excessive rupee weakness.

HSBC expects the Rupee to hover in the range of 62.5 and 63 per dollar next year. The Rupee closed at 62.94 against the U.S. Dollar Monday. That forecast doesn?t bode well for much upside on the currency front for Indian investors, but it does point to more stability.
 
Meanwhile, in other Asian markets where fixed income investors have a solid footing - mainly Indonesia and Philippines - a stronger dollar and a weaker Europe are problematic. India?s rupee is the best bet of the tradable currencies in the region.

HSBC feels Asian currencies will weaken against the dollar once the Fed increases interest rates, and further easing by the Bank of Japan and the European Central Bank will likely lead to greater regional forex volatility.
 
RBI eases norms for Infra Projects

The RBI has tweaked the norms for Infra Projects. The refinancing period can be up to 85% of the economic life of the infrastructure project. Secondly the revised guidelines allow the same set of lenders to refinance unlike the earlier requirement where 25% of lenders had to be new.

The revised guidelines will allow infra companies to align debt repayment with cash flows generated during the economic life of the project. The facility was earlier available only for new projects.

A host of power and road projects which are not yet classified as non-performing asset (NPA) will get a fresh lease of life as a result of this regulation.
Projects qualify for flexible financing option when the aggregate exposure of all institutional lenders exceeds Rs 500 crore

Fuel prices slashed again

Petrol and diesel prices were slashed by Rs 2 per litre each on Monday as international oil prices slumped to five-year low.

This is the eighth straight reduction in petrol prices since August, and fourth in diesel since October. After today's reduction, petrol price has been cut by Rs 12.27 per litre cumulatively since August.

Diesel price was cut for the first time in more than five years on October 19 by Rs 3.37 a litre when the government decided to deregulate the fuel. This was followed by an Rs 2.25 a litre reduction on November 1 and 84 paisa per litre on December 1. Cumulatively, diesel prices have been cut by Rs 8.46 a litre in four reductions.
 
IDBI plans NSE stake sale

IDBI Bank plans to offload stake in the National Stock Exchange. The move is in line with guidelines on investments in non-core banking activities of public sector banks, according to an exchange notification.

The bank currently owns 2.2 million shares in the exchange, equal to a 4.99% stake. Other stakeholders include SHICL, GA Global Investments Limited, GS Strategic Investments Limited, SAIF II SE Investments Mauritius Limited and Aranda Investments (Mauritius) Pte. Ltd. Each hold around 5% each.

The Life Insurance Corporation of India which holds 10.51% stake in the exchange, making it the largest stakeholder. The State Bank of India holds 10.19%. Delhi-based finance company IFCI, holds 5.55%.

IDFC is said to have sold a portion of its holdings in November 2013 at a valuation of Rs.4200 per share. This would value IDBIs stake at around Rs.1000 crore.

The company could possibly get better valuations this time around as the Nifty is 30% higher from the time the last deal was done.

Banks pay higher advance tax

If the advance tax payments by banks are any indication, the current quarter seems to be boding well for them.  The banks may have seen a strong quarter, possibly helped by treasury gains made on account of an increase in the value of their government bond holdings.

Advance tax payments of 15 top companies registered in Mumbai for the three months ending 31 December showed a 10.1% increase from a year earlier, primarily with the help of banking companies.

Among banks, State Bank of India (SBI) is likely to have paid Rs.1,420 crore, up 25.7% from a year ago as advance tax while Bank of India is likely to have paid Rs.350 crore against Rs.200 crore, up 75%.

Banks could possibly post higher net profits for two reasons. One is the gains that they make from the sale of the Available For Sale (AFS) portfolio of Government bonds. The second is the requirement for lower provisioning for bad loans.

The 10-year bond yield has fallen from 8.51% on 1 October to 7.83% as of Monday?s close. Bond prices and bond yields are inversely related.
 
China Flash PMI in contraction zone

Chinas manufacturing activity appears to be contracting this month for the first time since May, according to HSBC's preliminary or "flash" version of its monthly manufacturing Purchasing Managers' Index, released this morning.

The PMIs headline number fell to a seven-month low of 49.5, down from November's final read of 50.0, and dropping below the 50 mark that separates overall growth from contraction.

The output subindex extended its fall from the previous month, though at a slower pace, but new orders swung to a decrease, even as new export orders accelerated their gain. "

The rising disinflationary pressures, which fundamentally reflect weak demand, warrant further monetary easing in the coming months. The Shanghai Composite Index saw its advance slim to 0.2% from 0.4%. HSBC's final December PMI is due out Jan. 2.
 
Crude Plummets again as OPEC refuses to blink, Wall Street gloomy

Triple digit gains for the Dow were converted into triple digit losses as Crude plummeting yet again as OPEC refused to cut production.

The Dow Jones Industrial Average, which was up 123 points in early morning trade plunged 161 points by noon  as OPEC refused to budge from it stand of no production cut. It finally closed with a loss of 100 points or 0.58% at 17,181.

The S&P 500 slid 12 points or 0.62% at 1.990. It was the first day of trade below the 2000 mark for the broad based benchmark. The Nasdaq Composite shed 49 points or 1.04% to 4,605 a biotech stocks were under pressure. The Nasdaq Biotechnology ETF dropped 2.8%.

West Texas Intermediate plummeted more than 4% to $55.20, its lowest point since May 2009 and  January Brent crude was down 79 cents, or 1.2%, to $61.06 a barrel, after secretary general of OPEC, Abdallah Salem el-Badri, said the oil cartel had not set a fixed oil-price target.
 Separately, United Arab Emirates oil minister Suhail Al-Mazrouei said the group would stick to production levels even if oil falls to $40 a barrel.

Traders attributed wild swings in the indexes to a combination of factors, including `quadruple witching? event ? the week during which various index futures and options expire, unwinding of large positions by funds and uncertainty surrounding crude oil prices which resumed their slide after a brief rebound. Fear amongst traders was apparent by a 78% jump in the Vix index over the past week.
 
Energy was again one of the worst-performing sectors of the S&P 500 with the Energy Select Sector SPDR ETF sliding 0.92%. Over the past six months, the industry ETF has tanked more than 25% as the price of oil cratered 48% from its own mid-summer peak.
In M&A news, three companies PetSmart, Riverbed Technology and Talisman Energy did well. Since these are unknown in India , we are giving the details a bye.

Analyst actions also moved markets. Ford shares slid 4.7%, after Deutsche Bank downgraded the automaker to "hold." Analysts said they grow more cautious as the domestic auto industry enters its sixth year of recovery.

Cirrus Logic surged 21.8% as Barclays upgraded the stock to "overweight" and more than doubled its price target to $28. The firm believes the company's chips will be increasingly used in current iPhones and future models of the Samsung Galaxy.

Oracle shares added 2.9% after Morgan Stanley analysts raised their rating on the stock to "overweight" on "low expectations and weak sentiment" heading into the company's earnings report on Wednesday.

While oil prices continue their steady decline, it?s the sharp moves that would be worrisome. ?A sharp one-day drop in oil could trigger a panic selling of the kind market experienced in mid-October. Until U.S. crude prices stabilize, oil prices will not find a floor and will continue to be a drag on equity markets,? Frederick said.

Plenty of data is on tap for this week, though the big event will be the Federal Open Market Committee meeting and news conference with Fed Chairwoman Janet Yellen on Wednesday. Investors will be looking to see whether the Fed retains its ?considerable time? policy-statement pledge.

The Empire State manufacturing index, the first of the many regional manufacturing gauges to be released, fell to negative 3.6 in December from 10.2 in November, the New York Fed said Monday. This is the first negative reading since January 2013 and came as a surprise to analysts.

Industrial production rose a seasonally adjusted 1.3% in November, the Federal Reserve said Monday. This is the biggest increase since May 2010. Economists had expected a 0.9% rise. An upward revision to output over the past three months was another sign of strength.
A gauge of confidence among home builders ticked down this month by one point to 57, staying close to the highest level in nine years, according to National Association of Home Builders/Wells Fargo data released Monday.

The Nikkei fell to four-week low in Japan on a mostly down day in Asia, after the quarterly Tankan survey showed caution on the side of Japan?s manufacturers. Prime Minister Shinzo Abe?s ruling coalition won a majority in the parliamentary elections on Sunday.
Gold prices fell nearly $30, while the dollar fell against the yen.