Weekly Blog 21082015

Date: August 21, 2015

The week gone by has been very turbulent for the Equity Markets. This turbulence was on account of Global factors more than the Local factors. Chinese flash manufacturing PMI came at a 77 month low suggesting a slowdown in the Chinese economy, which may hurt the Global Economy as well. One major factor for the fall in our markets was also the weakening of the INR against the USD, which led to selling by FIIs. However not all is lost, as crude oil prices are at almost 8 year lows and likely to go further down. The lower crude oil prices should help containing the CAD to a respectable figure by decreasing the subsidy burden to a great extent. Inflation too is seen easing and IIP is seen rising. All in all the stage looks set for the RBI to cut interest rates sooner than later. We will leave the rate cut to be decided by the RBI though.

Also the funds exiting China should be coming to India, in short China’s pain is India’s gain.

Technically the market seems to have bottomed out. With strong support around 8220-8210 range, the Nifty may have touched its bottom and looks set for an up move. 

As can be seen in the above picture Nifty rose from the lows of 7940 to the highs of 8654. The Fibonacci retracement of this move of close to 700 points comes around 8220.

Provided Nifty has bottomed out, what are the targets for up move? According to technicals we should be seeing a rally in Nifty from current levels to new highs. The targets can safely be placed around 8900 and 9300+

India on 16^th July 2013 eased the norms for Foreign Direct Investments (FDI) in 11 sectors including Telecom, Oil and Gas and Defence. This was done to stop the slide of the INR against the USD, attract capital inflow and start economic growth.

What is FDI?

FDI is investment by a company by buying another company or diversification in business in a country other than its home country. The investments through FDI route brings in money which can help growth of economy.

FDI helps generate employment, better quality goods and services.

At this juncture India needs a lot of investment activity especially from foreign players to help restrict the slide of INR against USD as well as help improve the CAD. A push in the FDI can result in giving an impetus to the weak Indian economy and put it on a growth path. The pertinent question though remains if these reforms are a too little too late, we will see one by one.

1.       The INR has tumbled to historic lows of 60 to a Dollar, the damage to the INR is already done and the effort now looks like pouring water when the fire is raging. Futile to say the least.

2.      RBI tried to stem the fall in INR by increasing interest rates for banks by 200 bps. But it helped for only a day.

3.      The FDI limit in telecom is increased from current 74% to 100%. We could not find stake buyers when the limit was 74%, it is highly unlikely that we will find any takers even at 100%. This is partly due to the fiasco of retrospective tax on Vodafone.

4.      Defence sector is opened for FDI on a case by case basis. This step is welcome but the GOI has to take care that there is no security breach and the case by case approval does not mean scope for more bribery.

5.      Barring petroleum and gas the other sectors did not need big ticket FDI. Petroleum and gas FDI will help the exploration and extraction activity and boost the sector in a big way.

6.       Merely increasing FDI limits in various sectors is not going to help. Implementation is of utmost importance when any policy decision is taken, and the track record of implementation in India is abysmal. India lost out on two big steel projects on 17^th July, just a day after the FDI limits were raised, due to red tapism

7.      FDI in multi brand retail was announced last year but till date there is no taker for it. Not a single rupee has come for FDI in multi brand retail.

8.      At this point of time interest rates in India are at a very high level which puts Indian competitors at a risk vis-à-vis, their foreign counterparts.

9.      The incumbent Government has only one year in hand and investors would be very sceptical of investing at this point in time. There may be policy change when a new government comes in next year and no investor would like to take that risk.

10.  The Indian economy is currently gripped with the vicious circle of dwindling rupee, high interest rates and high inflation. The interest rates are unlikely to come down in a hurry which will also reduce tax collection of the Government which in turn will require more borrowing from it pushing the interest rates northwards.

Unless business confidence rises in the country, there aren’t going to be any takers for the FDI. The latest blitzkrieg by the Government looks to be futile and a deep investigation into the systemic problems of the Indian economy can only help in saving the economy from complete collapse.