India Morning Report: Markets start the day at all-time highs from 6400

Though, it could have been better for the fundamentals, markets have not caught up to earnings increases over the last decade and will probably keep the gains in this weeks rally as the Rupee finally responds to buying and moves back to 61 levels without showing signs of tiring. As it moves further along to the top of its range to the 60 mark, consolidating yesterdays gains over another week, the currency does have a limited headroom as the Dollar Index is trading below 80.

Banknifty and IDFC are keeping their gains and moving north even as the indices savor a moment at the top and a lot of the individual stock memes switch , with Energy and Pharma both offering unique ignored opportunities that may well be taken up, without ruling out the better consumer scrips consolidating to new price levels or for ICICI Bank and HDFC Bank ( including a final decision on its cross holding by HDFC , still pending for renewal of its Foreing investor limit)

In Consumer we continue to back Bharti , ITC and Bajaj Auto. Yes Bank seems to be popping the champagne again, while the real estate pack will lead the way back for a quicker correction if interest in the sector runs up a bigger tab

ITC may again start up from 320 levels , if you are a trader and need to offload the stock currently. Bharti seems to have a new partner in sight for its retail JV( which I will tell you later why is not the ideal reason for backing the stock, like its financial foray earlier) but there are more fundamental reasons for owning the stock

Exiting DRL is a good idea at these levels

A lot of cash stocks have steam trading much below their lifetime highs despite good fundamentals like GAIL while the PCR is also a bland less than 0.9 with PUt OI still being extinguished , probably a precursor to Puts being written as confidence in new levels increases in the Indian markets , as they lead a global equity rally with the Dow a little behind as it is already at record highs. Markets have a long week ahead next week before 6400 Put writing becomes economic and the markets rewrite 2014 forecasts.

India Morning Report: And it is clear thru to 6250 from here?

Most short strangle/ straddles would be in profit to have exited and is you have been a bit late you should close out here because the markets are going to have a position either way, mostly likely trying to forget the break between 6100 and 6250 as markets have been given the mandate to a new bull run, which might well start around 6250 again. For a change both networks are carrying investor conferences, apparently not the same but more importantly, the post budget rush to 6100 (more like 6150 ) came yesterday and was backed by real flows, the current levels thus likely to have fully bought in leaving a new index level before the argument over the direction for India starts, global equities being decided on the up.

The bet o f going short on the S&P500 is not necessarily linked to the single up move in Emerging markets and while the longs in Emerging markets continue, the shorts on the S&P will either become OTM hedges or extinguished as US markets also resume an uptrend

An INR 12.7 Tln expenditure budget is fair enough but the optimism allowed to him on tax revenues from a recovering India economy is likely to have brokerages just the right busy for traders and speculators to remain ahead on the risk trades  before being called out by their analysts. For example, yesterdays dissection of each such number as a “little too optimistic” finally seems to have gone unheard as it should in a believable bull segment. However, despite our India story being better than China, a sscal e of 10X will likely apply in comparing flows to the two markets alone and India will be able to win that argument for $10 Bln every quarter.

ITC, Bharti are not overvalued in the Consumer space. We cannnot see value in the HUL trade whose markets have matured in India. Other consumption stories never scaled anyway and that therefore is the limitation of investing in Indias FMCG story except the ‘other’ 2010 winners as titan and ttk remain down and the domino’s pizza is no longer the story as expected after the DD ride, showing up the absence of a secular market and pizza hut coming back out in investments despite the Dominos’ 65% share (Jubilant Foods)

Bajaj Auto may not have substantial price cuts that have  shown on the radar for Hero after the budget giveaway

There seem to be big earnings leftovers with DLF and ABB following on , ETNow catching them for a change, but one understands that CNBC mode better, having ignored these latecomers and even penalised them. Its definitely my strategy with such presenters. DLF has a 60% higher sales revenues , with or without their main contribution this quarter from the sale of Aman Resorts as costs remain high for the real estate company

IDFC, YES, PNB and ICICI correct after yesterday’s rush for buying the select list while shorts on Kotak lead the cut in all such Financial stocks. I will look to shorts jumping SBI again, but probably waiting to coalesce th ebull candles into a stronger up force. PNB is coasting at 540 post a week long correction mode after a day’s ibig wins in the post analysis.

LIC Housing is probably as good for the medium term as the Power NBFCs, all the 4-5 stocks at the bottom of their range and Sundaram and the Gold NBFCs unlikely tpo o be competitively buoyant. Axis Bank would support Bank shorts as Kotak and thus Bank remains available as a short hedge too. Cipla and Lupin present a new problem as they continue to activate a bundle of no good stocks they were partnered with in their defensive mode and are not trading bets as they reach the top of their range near 450 and 1200. There is no secular run in metals, none in construction and Tata Steel remains a buy with the auto stocks without Tata Motors or the Unitechs and the HDILs

Modi is looking at some obvious chinks in his own armor as he stands on a half poant English speaking tour, showing up equally worse off in Oratory as Rahul, but looking comfortable with one new round of Desi dose goevrnance for India Inc

From my end, Chidambaram was more than right in showing UPA’s 8.4% and 6.6% 5 year periods ( 4 year periods) against the 6.2% average, but apparently there are not enough Financially literate voters around, despite the preoccupation with growth

 

 

India Morning Report: There is no hope trade in sight

But I’d say keep accumulating as the indices break through a critical 6000 mark. Many blue chips, like in global markets offer extreme value in buys even as the speculative trade fails to take off on a delayed recovery.  Gujarat’s downfall over the small matter of a receding poverty line not helping the cause of the markets rich BJP is a puerile coincidence for the markets, but correspondingly there is no Congress faction left in the markets to buno the tanabana, Markets selling the stable BJP proposition backing out for an increased negative momentum(undesirably sharp)  on the downward side

The IT trade coming into profit taking for the almost first time except for a pre results redenomination, there ae buyers out there who are ok with the premium on Infy to a low 3475 market price and HCL Tech is good for a move of Rs 100 or more. Thus if all sectors move together like the Tuesday open, markets could see almost unheard of hlevels receding to 2012 levels no longer required by the New Dolla r prices. That also means these exits will cascade the Rupee even as it holds at 62.50 to 63 levels , that being a new fresh level for the currency. However it is still possible that with DIIs coming back as markets sell off that the gradual sell off can indeed turnaround and complete the prophesied ( by certan others , also old hands) pre election rally in India. The sell trade on ITC will likely never exit 290 levels an such picks abound with limited downside even in the correction which will confuse buyers into making losing commitments so a wait and watch is necessary. F&O markets return back to index only specials and i the downmove is to be arrested by Vols at 14 this will be a small enough move, but that is unlikely leaving vols (India Vix) ranging between 14 and 16 till the first buyers return whence new VIX levels would only see increasing volatility

However as we were stock specific going up and DIIs look for bargains to pick up pieces, there are gaps in how the markets will rebuild momentum most buyers holding on to prior 2013 selections including the new Aurobindo and Sun Pharma trades( a great defensive for mopping up your prop liquidity) in IDFC at 90, ICICI Bank almost ready at 930 levels ( the next levels are around 871), Yes Bank ( bottom at 267 will likely not reach the same so accumulating should be ready  – like a dark pool premium),  Bajaj Auto, ITC, Bharti and no – not ttk and titan currently as there is much more going down in that specific market despite the penchant of the self funded margin traders in our domestic brokerages like Angel, SMC and Centrum including the overlap with commodities wealth accounts. There will be no dlf trade north, none in Jubilant foods, titan or ttk and none in HDIL or unitech much later. Axis Bank’s orphaned again being misused in the prior rallies, leaving nay of the F&O speculators heading there at great risk from those targeting their brand of stupidity after getting on the right investments. Trading as a game may try not to suffer though sharp bear phases and quick bull recoveries are not ruled out with brokers and traders living the cricket dictum of well left alone even for great value picks in Midcaps The trades are mostly in Spreads, Bear spreads in your choice made by buying Puts at the just OTM (ATM-OTM>= 0) and selling a lower put to part fund the trade. Bull spreads, which wold be due n a couple of weeks, go bought Call just OTM (ITM-OTM>=0) which reflects better liquidity as well and thus better premiums, and partly funded by distant OTM Calls ( nly one or two will have  tested and liquid quotes where you do not pay excess liquidity spreads)

 

Bank Policy Tuesday: RGR raises rates to 8% on Repo and 7% on Rev Repo

Maintaining the Channel at 1% and the CRR at 4% , the third quarter policy will go down well if markets in credit ( inter bank markets) continue to gravitate to reverse repo rates for borrowing in lieu of improved liquidity. Most hawkish analysts would improve their forecasts of rate hikes basis the new policy implemented in the third quarter. Our day’s review of Urjit Patel recos shows it is unlikely to be in an implementable form for some time and cannot be proposed into active roster during FY15 and probably FY16, but then it is a function of Central politics in 6 months from now

The Macro review admits to a loss of grow momentum. CPI declined as food groups obliged WPI at a four month low and the report notes the mall uptick in Cre inflation which is still very much below a healthy 2%

Hardening prices of services and key intermediates seen in conjunction with rising bank credit, increase in order books, pick-up in capacity utilisation and the decline in inventories of raw materials and finished goods in relation to sales suggests that aggregate demand pressures are still imparting an upside to overall inflation.

Policy stance incorporates the glide path to CPI envisaged in the UPA report in six months

Term repos were conducted in the later weeks of January despite Advance Tax payments to improve liq after Government Balances rose. Trade deficit is down by 25% in nine months. CAD has been forecast below 2.5% in March and CPI(Combined) expected to be ranging 7.5-8.5% at the end of the fiscal and FY15 before the next target of 6% kicks in.

The GDP fan shows a 4-7% range by Q4 FY 15 with expectations of growth from agri included in the RBI prognosis, forgoing their choice of a sticky move in Repo rates north to 8%. However the new Governor does admit this was an on the edge decision leaving further moves to the south probably open if his version of noise in the inflation is rested appropriately further, and improving chances of holding at 8% on the Repo rate and 9% on the MSF. On the whole, post policy action is still likely to raise interest rates in the Indian Economy now prior to the returning of the miracle grow / prodigal (not RGR reference obviously) though banks may not raise lending or deposit rates and Transmission issues remain with Banks using excess liquidity in borrowing from LAF for investments(govt borrowings/adjustment auctions)

Import controls, mostly on Gold brought CAD 1.2% in Q2 and the liquidity measures on Sept 5 , rejuvenating post impact from the currency crisis resulted in inflows of $9.1 Bn in equities and $14.1 Bln outflows in the Debt segment till Mid November (since May) were balanced apparently by $3.8 Bln in inflows in Debt since

MSF rate was only brought down by 150 bp since with elevated inflation expectations resulting in a repo hike of 50 p till now, which is likely achieved objective but still leaves the threat of increasing repo rates out, we would say another 50 b p is ready in the bag assuming yields travel to 8.5% , which would have been stable conditions this policy but are likely to be six months out from here given normal growth henc as yields likely move back to the 9 benchmark in the intervening period

Markets dipped on worries of UPA report making it and the unexpected rate hike before biting the bullet at 6130 levels during the presser.

India Morning Report: A tough hand dealt in the Financial Stability Report

Loan
Loan (Photo credit: LendingMemo)

The Interconnectedness of the Indian Banking system, might have become prioritised for a global caveat emptor learnt but the Indian system has much more downside from our desi PSU style profligacy in SME lending as haircuts on even 50% of that stressed portfolio would take the government out for a long walk in the woods. Delving a little more indepth into our favorite subject, most of the stressed portfolios in India Inc’s first stress tests were found to be in Infra, Mining and Cap goods sectors or our core Infrastructure series components and those would anyway need to be treated differently than Ordinary term loans . Such loans constitue 54% of the Stressed assets identified in the FSR.

However as the Financial Stability Report remarks, there is a fundamental risk to about 60% of the credit stock in the Banking system collapsing banks even as they have primarily not created a laconic lee side for the Ghat monsoons in interbank lending primarily one supposes thru traded CDLOs and real lending on larger accounts  than derivatives without a defined underlying as in the global case. The risk as highlighted in the FSR come from defaults in lending portfolios of Banks skewed to single corporates apparently among other details one has to study from the disregard of concentration risk by lenders with the 20% to single corporate and 25% i think for group key limits to be tightened and enforced duly.

India on the other hand has to grow the Securitisation pie  from here and where the Central Bank would be trying to control INR 1.7 Tln in repayments due till 2017-18 from the next fiscal onwards (FY15->2014-15) , India would indeed face an uphill task the markets would do well to ensure they have factored in. HDFC Bank too never got that approval for added FII investments even as Axis Bank application was cleared last week(to 62%).

Back to the mundane diary of the Indian markets for the day, Markets trade leaving the upside intact as shallow trades characterise the last trading session to 2014, much like last week’s record low of INR 740 Bln in the full day of equities and derivatives trading on the NSE and BSE and Cash volumes are likely to stay below INR 30 Bln (the last week low was INR 50 Bln) probably. US and European Markets are closed on New Years Day including Fixed income markets (at least in the USA) The other thing to highlight from the watchful Fiscal Stability Report is RBI’s worries on the Growth – Inflation dynamics not working out as WPI continues above 7%  which we led with sometime in November.

Net foreign inflows continue to sweeten the deal for India inc into 2014 with a 1.5% CAD (FSR score 1.7% and a FY14 achievement score target of under 3%) and the Fisc even if the virtual spending shutdown (as in the last 4 years) from January will soon find another yawning gap even if FY 2014 indeed perks up reasonably. Hopes of a stable post election scenario have almost been crossed out in case you did not notice in the New Year’s eve  celebrations and the infra pack, high on investment hopes and leadership from IDFC, and a deleveraging trio incl GMR Infra and JP Associates with the Relinfra people facing their first AAM Party audit

Apparently new year’s eve also sees an uptick in Tata Power and Reliance , which one doubts will last esp as Tata Motors is receiving its recognition only for its minute share of the TESCO-Trent JV like in fact here was such when Starbucks burst onto the subcontinent scene. The Starbucks venture is well-defined however, and the ware tastes well, drawing in big crowds in now 3(Three) cities in India

Redesigned logo used from 2011-present.
Redesigned logo used from 2011-present. (Photo credit: Wikipedia)

What probably did not get highlighted but was tried earlier by RBI, also needs to be monitored for results as Foreign Banks continue to skirt the Living Wills issues at Global HQ and continue to rethink their strategy with regard to entering India. Apparently Gross NPAs will start trickling down as we long suggested but Fitch and a few others are still hoping the PSU disaster will play out to bigger stakes and at a faster rate to make a return virtually impossible ( especially if larger Government injections are requird to keep them floating – KV Kamath). However, I would just depend on the investment recovery and the credit growth performance by Private Banks and probably PNB as Deposits finally outpace credit in the last bi monthly reports on the Banking sector in Calendar 2013 and the ICDR hopefully comes back to respectable levels without Banks having to constrain such new lending in India’s recovery phase

Also don’t take me to be a cynic but Torrent and Lupin’s timed leaks about Pharma’s assault on a generic version opportunity for Cymbalta may be better timed but is still probably a few months away from translating into Dollars and one fervently hope ( and cannot claim to otherwise yet concretise) that the generic provides an opportunity to us more than the cookie cutter $200-500 mln with or without first mover advantage.

Bank Policy Wednesday: India stands PAT on rates in December

Even as RBI shows concern about the retail inflation, it has probably factored in the welfare sustenance supply chain requirement that has necessitated a higher tick of Food inflation likely to last till 2015. Even though the jump in core inflation to 2.66% has reached worrying levels, the RGR regime has played it on the level, standing by the current Bank rate at 7.75% . As banks have already moved off the higher MSF lending or the last quarter, banks would anyway be unaffected by the lack of change but the markets can seriously take the impending rally’s mechanics from here .

The FOMC reports later in the India day, closer to midnight when they can , we agree, start with an early taper. However, The Fed meeting is likely to also be a sendoff for Ben Bernanke and so any such major policy announcements may be skipped for Janet Yellen to attend to in February, April or even June 2014 and as the Fed has managed so adroitly, the Taper would not mean tightening. Though the Dollar remains weak, the Taper is unlikely to still avoid the Dollar strengthening into a vise like grip on the US own Economy.

On India’s Policy announcement, the 7.5% mark would have been even better but as noticed concerns on Food and Primary inflation are real and may spill over to Core inflation unless kept in check. The RBI Governor notes that Vegetable prices that jumed 99% in the Friday WPI report may fall sharply.

Yesterday’s Review noted, in the overall scenario

In India, the pick-up in real GDP growth in Q2 of 2013-14, albeit modest, was driven largely by robust growth of agricultural activity, supported by an improvement in net exports. However, the weakness in industrial activity persisting into Q3, still lacklustre lead indicators of services and subdued domestic consumption demand suggest continuing headwinds to growth. Tightening government spending in Q4 to meet budget projections will add to these headwinds. In this context, the revival of stalled investment, especially in the projects cleared by the Cabinet Committee on Investment, will be critical.

Banks have garnered $34 Billion from FCNR Deposits and India’s FX reserves have jumped at a $5 Bln every week from $277 Bln odd at the end of November and now at $291 Bln. RBI continues to flag the negative output gap and even a slowdown in Services

Also factored into the December decision is the virtual shutdown in Spending by the Government from January as revenues remain not so robust, which would strain interbank liquidity (LV?CNBC18)

It is good that RBI has returned to not being overtly reactive to the inflationary economy and GDP in March could have a larger chunk of the good news premium Indian data has been lacking since the year began.

India Morning Report: Market correction sows signs of split down the middle?

English: Human Capital Investment Model!!
English: Human Capital Investment Model!! (Photo credit: Wikipedia)

The correction from yesterday’s opening highs continued into Tuesday, as markets have opened with Banknifty below 12000.

What has transpired is that the correction and the realisation of the individual mixed fortunes of investment sector favorites like L&T and BHEL have combined with a strain of distraction from the recovery as investments into the real economy continue to lag and the same has seeped into the other Capital investment beneficiaries including drilling and project engineering stocks like ABAN and others, forcing the markets into a rumination on whether markets will resume any bullish candles in the remaining days of the week settling in at 6350 levels for most of the interest additions till mid series. Pressure on markets will however ease as Put Call Ratios trundle up on every such small reaction and saturated markets will only unwind shorts. Thermax is definitely on a stronger wicket compare to other Capex companies

The FII portfolios had added $5 bln of flows in the market rally since September, all being attributed to a BJP vote and change in government since Sunday but the production data coming towards the end of the week and the RBI rate hike designs may likely be sullying the recovery for the markets. The Fixed Income yields are down again to 8.88% after showing the strong surprise in splitting from a strong rupee back into the historic strong Currency /Bond markets stream at 8.88% yields after Rupee also lost most of the gains at 61.25 in the morning’s trade.

The RBI’s cause to not live with Inflation seems surprising as also the increased likelihood to get the MSF higher to 9% in next week’s announcement with a corresponding 25 bp hike. However as Rajat Monga points out in CNBC TV18 snippets, the banks are quite comfortable with the current liquidity given the policy rates and the bond markets at 9%

NTPC struck 10% lower after CERC guidelines announced take Power Reform to a new level. NTPC has been utilising the gap period making up for unavailable guidelines by showing tax activism towards consumers which has been hit b the regulator primarily as it also moves towards Generation based incentives

CERC reforms have hit ancient contract ridden NTPC which continued to charge differential tax rates to customers while paying lower rates at a much later time , an arbitrage blocked by new CERC guidelnes. Distcos will not be impacted as much with Hydro projects enjoying a 35 year useful life along with the Distcos and Powergrid will be connecting the South grid adding Power to shortage marred Andhra and TN

Comment period lasts till Mid Jan for these guidelines whence other clauses impacting the Power companies will be clarified but do not impact the ROE assured by CERC for 12% on older PPAs and up to 16% on newer pricing including PPAs

English: Image depicting Central Electricity R...

 

Bank Policy Tuesday: RBI Governor completes policy action

inflation
inflation (Photo credit: SalFalko)

With the forced liquidity constraints as the currency devolved on the nation in June ( after May 21 announcement) RBI was stuck in the middle of a rate cut leg of its policy to encourage growth. Already hampered by banks using Central Bank liquidity to the extent of INR 2 Tln instead of market, the Central bank’s rate hike onsequently in September even as the MSF hikes were redacted and brought back to the normal line may finally break the back of the markets on the verge of a bullish move from 6200.

The only inflation out of control however is the Food inflation which may not respond to any rate hikes and this rate hike may just be a mechanistic response continuing since Duvvoori Rao demitted office to stabilise the higher rate environment, in which case India may old these levels for a good six months, and in developed markets this new intermediate leg could have lasted years, till the rate cuts can begin again.

Meanwhile consumer staples will continue to see large double digit price increases to correct 2-3 years of suppressed marketing budgets and pricin pressures unrequited to keep basic sales growth alive in consumer markets

The announced policy steps however will increase bank rates and as retail lending has reounded such increases are largely going to be absorbed by consumers and however will have had debatable impacts on fueling furthr inflation now controlled by bank rates. NBFC business is already looking better in consumer durables with a clampdown on 0 interest loans and while that may not segment the market in favor of first time durable buyers that have been an absent quantity fooling marketers and policymakers, it will continue to better control the negative output gap with more advantages for NBFC lending even for banks that have already relied a fair portion of their portfolio on the sector at the expense of obviating the real winning consumer sectors or industry sectors winning n the changed scenario

RBI hiked rates 25 bp and MSF channel has returned to 100 bp over the repo rate clearing the path for a return to the Repo rate as the Bank rate.. WPI forecast has been banded to the central bank’s comfort zone as 6-7%. GDP growth is updatd to 5% for FY 2014

The banks lead the Nifty comeback post policy action as they assume the deed is done and currency will consolidate around 61-62 levels before going back to the trade deficit control led highs nearer 60-61 levels The sponsored rally ost policy is however blushingly even across non actors and non performers in the banks bunched with YES Bank, ICICI Bank and even HDFC Bank and Axis Bank. IDFC has recovered its morning deficit too. BOB is up 15 pointsand BOI is in the positive with Pharma/result candidate DRL also staging a mini rally. The short on LIC Housing ahead of results has also disappeared and tomorrow’s results are likely to see fat positives as sentiment needs a good build up and inflows ontinue to allow market makers to perform as such and the Financials are likely to reward investors who stuck through the unreasonable 2 months pre the last MSF related policy action. Further policy action unless embargoed by inflation is likely to stay with seeing the bank rate climb down from the current MSF 8.75% to the Repo rate of 7.75% ( The Revese Repo is 6.75% where  RBI issues new collateral securities)

 

Cut in MSF, RBI to monitor CAD and Inflation(WPI)- Bank Policy and Mid Quarter Review (September 2013)

RBI followed Fed into the ever present snare of having lost the confidence of the markets when it decided to recalibrate repo rates while decreasing MSF rates to 9.5%. The Repo rate at 7.5% in fact allows the 200bp cover on the normal MSF as it now stands exactly at 9.5% but the markets were spooked by an anti inflationary stance from the Central Bank blocking out possiblities  of growth returning in the immediate future.

RBI has in the meantime further eased intra day trading on FX limited for banks along with the extraordinary increase in MSF and Bank rate last month. The Reverse Repo rate is also notified to 6.50% and though the bank rate has not been updated, it has been notified to 9.5%. Unfortunately with yields pulling away sharply to 8.3% levels despite their being room to move to 8% levels after the policy announcement, it means markets and inflows are now gong to try and make economic judgments all over again and with no other policy action forthcoming that could fiscally pressure India all over again ahead of the tightening in December

Daily CRR has been reduced to 95% from 99% allowing banks a little more flexibility but CRR and SLR together still account for more than 23% of the Banking deposits

Changes to liquidity rates can be effected further at any time before or after he next policy review. The Mid quarter review sees to balance the good monsoon’s impact as he negative outut gap now expected with the increase in risks on CAD and inflation

RBI’s stress on WPI seems unwarranted at ur end esp wit Crude levels coming back to manageable levels even as they go down further.

RBI Mid Quarter Review 11 am  

RBI Media(1pm) and Analyst(3.30pm) Webcast –

USA: 1 866 746 2133
UK: 0 808 101 1573
Singapore: 800 101 2045
Hong Kong: 800 964 448

INDIA Dial In : +91 22 6629 0341/+91 22 3065 0128

 

India Morning Report: It’s Monday and all’s upsy daisy in waiting

The Indian Rupee opened near 62.50 levels, a 2% jump from Friday levels well likely to follow last week’s 2.5% crawlback and the prospects of a bleary liquidity hit SuperFed becoming a scrawnyScrooge MadFed retraced as Larry Summers gave in to a Democratic caucus on the Banking Committee, incl Liz Warren and withdrew presumably in favor of Janet Yellen in the Fed changeover. The Fed will go ahead with Tapering as planned and that news is in by Wednesday. Indian Markets of course are then going to take the opportunity to break away from the global correlation and set a few ground rules for an Indian recovery. The WPI at near 6% again and the continuing pressures of the CAD and Bank reforms are likely to cause markets some sleepless nights too ahead on the turn. But before that a 6000-run as promised is nigh and mostly the mark would even be hit in today’s session itself in late afternoon trading given the Rupee level jumps are not adequately referenced in the 70-point Nifty jump in the pre open

Banks , even the lagging PSU Banks are finally in the limelight and the resulting breadth available to buyers is likely to be good tidings for the market. Reforms in the G-Sec market may well continue as caps on FIIs even without auctions are much easier today and probably reflective of the real appetite for Indian debt at $25Bln G secs and $45 Bln corporate debt now allowed to QFIs

LIC Housing is back in the news but if its that banking licence then one is not sure it is right for the market recovery esp with the 80-20 disbursal rule out of action. IDFC may be done with shorts and Power NBFCs may be ahead in the lead. As more debt reforms pick up steam and remaining restrictions on G–debt are removed, it is likely the NBFC sector’s institutions will also increase in priority for the markets. As of now effectively there is only one on the run (lquid, current) 10 year security available and it is issued by the RBI.

Really, though markets are up the traders’ picks on networks could point to the list of mid-caps just likely to gain from the liquidity rush and may not reflect any real fundamentals and is probably sign that these low mid caps list in the traders favorites needs to be changed more frequently. Notably, Voltas, Jindal Steel, UCO and Union Bank, Future Ventres and NHPC are probably candidates for non performance and “no results” in their respective sectors and will be trgeted wins as market favorites because today nothing can go wrong for the pro traders. But many other pro traders now would pick the over NBFCs and other good picks not at variancce with what Foreign desks have also short listed in the last four – five years

 

India Morning Report: There is the Rupee and then the equity markets…

Map of South Asia in native languages.
Map of South Asia in native languages. (Photo credit: Wikipedia)

 

Frankly, there is nothing much to hold the markets after they broke 5500 and the markets below 5000 Nifty levels are likely though still not extremely likely as values identified in the Top 20 liquid counters will probably include those already having fallen to their lowest levels of this rally’s beginnings or within 10% of the same as ITC and Bharti Airtel indicate. That also means institutional buying that has resumed in bits and pieces will characterise this market thru the breakdown. Even though Bharat Iyer of JP Morgan also put on a brave face and assumed Fixed income to be just duly following the currency mechanics, structurally markets are ready to ignore the falling Rupee between 64 and 68 once it starts that leg. I personally do not think interest rates derived from FX have any significant accurate behaviour, esp where in India both markets are relatively illiquid and dependent on key PDs for volume business

 

Though nominal growth is unlikely to be the promised 15%, shift to it sector has created an exchange that is leading scrips to oblivion and not really any structural factors as they remain exactly where we always were. Infrastructure and Metal sectors are actually at their best take off points now both for Fixed income and equity QIPs the latter a little harsh for promoters, and secondary market floats in infracos could find considerable long term investor demand soaking it up.

 

Similarly, rating agencies’ almost junk BBB-/BA2 ratings on India are in fact already indicative of this breakdown and may not need a correction giving the rating agencies to correct their now identified goodwill gap in asia esp india and South Asia, that can thence merit a suitable upward notch everytime CAD is actually brought into control. Strange, but true.

 

Fixed income markets are set to lead the way meanwhile to double digit yields on the 10 year bond already hitting 8.95% in morning trades as Rupee takes up 62.3 levels before moving on to 63.30 ( TV18/CLSA) as the next Technical target. Banks presumaly are also paying for their investment portfolio breakdown in this move and do not have fresh cash to borrow and place in the 11% short term and even the 8-9% 10 – 30 year bonds for substitution of current loss making AFS and not taking everything to HTM.

 

One year down the line, with a stable government maybe instead of hiking deposit rates we will see the yields going south again. Oil is back above $110 levels and Indian buying will comfortably take out 67 levels for the Rupee

 

 

 

India Morning Report: RBI Announcement brings in the relief jump

Markets, finally assured of their assessment of the long road ahead, jumped at the heartening news , though expected, of no change in monetary policy parameters from 4% CRR to 23% SLR and the bank rate temporarily at 10.25%. the Central Bank will “rollback liquidity steps in a calibrated manner” when stability returns and the yields are already south at 8.05% , Rupee climbed south at 59.75 levels but unlikely spoiling for a flight/light immediately as markets parry at yesterday’s levels but back in the green after the jump in selected stocks

The jump has of course died as he policy announcements are over, an unseemly trend, now seen twice in the last 4 years Our detailed RBI policy analysis will be available. Futures and options markets could be demotivated in volumes after the Rupee spike , still not sure of a trade after the loss of growth policy eigenvalues and a lack of a down trade in the Equities or Fixed income markets in this month. Oil payments schedules can probably be aggregated at the end of August

Credit Growth / Deposit growth projections in the quarterly review come in at 15% and 11% respectively. Banks will be unable to raise rates in either direction in a hurry. housing NBFCs seem to have lost the most, lIc housing levels at 180 unheard of and IDFC (Infra, PE, AMC) at 110 levels after a long break of nearly two years. M3 growth will be 13% as forecast today the High CAD for three years has been highlighted by outgoing Governor as a structural risk. The next RBI review will fall immediately after the expected Fed announcements of QE withdrawal in the September policy

RBI did right and is on watch but it seems that money is still pulling at the current Rupee levels as the Oil calculations get ready to upset the new equilibrium and the BoP risk comes fore much before exporters catch the new opportunities

 

 

 

India Morning report: Oil signals treated as critical sell levels for the Rupee (This week in Asia on advantages.us)

English: Graph showing Indian rupee and U.S. d...
English: Graph showing Indian rupee and U.S. dollar exchange rate from January, 1990. 日本語: 1990年1月からのインド・ルピーとアメリカドルの為替レートのグラフ。 (Photo credit: Wikipedia)

An old adage for the market, it is now a repeated phenomena in the global markets for India to retain the dubious double distinction of heralding global commodity lows and be cornered by the slightest sentiment building in Oil. The day thus is a weak barometer but may soon gain ‘tumbling’ significance for global currency markets as the Rupee will be decimated to even beyond 65 levels if Oil rally does gain strength.

However as it is unlikely to happen for now, long investors may not be able to leave Indian shores before it eventually does, giving the upper hand to hot money flows as opportunities run out with the Yen at 99 and Euro also not facing new substitute demand, yields going up from global lows in various central bank auctions in Europe throughout June bringing short term rates to near above 0.5% and even closer to the 1% mark from momentum extrapolation(as will likely show)

The Indian Rupee has been closely pinned down earlier in 2009 and lack of buyers remain its “new” worry in global trade share increases as Yuan manages a smaller volatile range despite an equally suspect recovery path due to a paradigm change from South east, Coast Only development to a more homogeneous spread as legitimised by a 5 year plan.

Back to matters at hand PSUs like BOB will probably lead the bank indices down even as most new banks will make likely a good sector lending structure possible in the higher spending towns and villages of India that have kept Rural CPI apace at double digits till now. Muthoot’s Bank may indeed be a new kind of entrepreneurial venture in banking as long as they meet RBI conditions and manage not just the minimum net worth cap but raise the bar for fellow new anks to the desired but not contingent levels of INR 2500 crores of $400mln and even INR 10000 crores or $1.6 bln whnce an opportunity the size of India may be deemed fit. This size of course may not be ready on day 1 but should nonetheless be planned to those levels with capitaal lines tied as was behind the uccess of private insurance in its infancy in 2000s

100% telecom FDI for India thus might mean in an indirect way, better days for Oil consumers even as demand returns to the US market after a good 6-8 weeks in yesterday’s reported data and are critical for the market to retain 5750 levels on equity indices. ITC and Bharti remain on the up and up in block deals for FIIs or even program trading where such volume is amenable. Yes Bank might see another block of additions by FIIs as it exits a RBI ban on foreign investments and has quite some potential before reaching the allowed 75% levels currently in the sector HDFC/Bank prognostications for a 100% FDI in the sector linking its scrip fortunes to the same may see thus a longer gestation period till the new government is in place in 2014 and indeed starts picking up the courage to forget its pre electoral hang ups with FDI if any

 

India Morning Report: On your marks, the rally is set to gooooo..

5850 levels would of course cede thru the week as correlation is reestablished and an agreement around the RBI call yesterday seems to have been on target to set the H2 rally in motion. Institutional investors have been selling the index futures hitherto a transparent look ahead hedge initiated for the select longs that have been holding the market above successive water marks since August 2012. Index futures selling aside, the Rupee move should also stop here at 58.50 or above that back at 57.90 whence long buying in scrips thought to be carrying their sectors and the indices are in fact treated to further quality buying

Godrej Nature's Basket
Godrej Nature’s Basket (Photo credit: vm2827)

However in concrete terms shorts on Godrej are a great idea as are longs on ICICI Bank and M&M. The side tag wars of Godrej and M&M in scrip selection if any for both promoters based from ‘amchi mumbai’ are non existent primarily because fo the inconsequential daily volume of 304k in Godrej Industries and thus for your institutional desk it is a single trade scrip, one position ruling its trend and thus will be a short beyond 20 levels too if one wants. M&M and USL similarily lead the remaining value in the market as some smart promoter moves, especially the M&M deal with a foreign promoter scaling up its auto ancilliary units in a single consolidated operation. USL is as good as a iDFC but as the network pick presented (Dimensions?) it is in a strongly invested position. M&M is also important because consumption will also come back in the second half once the recovery is in play.

Banknifty drift is transcendental and unlikely to impact the prospects of private banks leading the rally.  SS had a great pick in Dena Bank and PNB is also a great long. Air Asia and Jet Airways take off on new India inc rides that are definitely more significant than mere exploration with Ramadorai in the chair at Tony Fernandes’ Air Asia and SEBI following up rigorously on the 51% Naresh Goyal controlled Jet and the “???” Indian controlled FDI by Air Asia in almost an established Malaysian treason habit in India investments

The sudden jump in Gold imports still does not mean good redeeming news for Titan or the slip on the CAD but is probably a last hurrah of the clampdown/controls. Jubilant’s correction looks like could continue another 20% down after the move back from 1300 to 960 in pre-open today one also feels that shorts on REC or Jet are misplaced at these levels of 200 and 460 respectively. Buys on ITC and Bharti Airtel are likely t o hold for longer term though minor corrections from these levels as for YES Bank have to be watched for, including any newsy disruptions to them. FDI increases in Banking and other sectors ( though not Media or Legal sectors) are looking likely but within 2014 H1 after government formation is cleared and not in going away policy presents which would e intemperate for the coalition at this point and more importantly for India Inc.

India Morning Report: A new bank, not Citi, 8 not 4 and numerous other slips to the mile..

Vikram Pandit’s new efforts in India with Kampani’s JM Financial may get JM a 10% bump in stock quotes but it is unlikely that his 50% buy of the subsidiary and 490 million warrants worth 3% of the listed company with Hari Aiyar and wife in the new bank application at this stage will build on anything like branch infrastructure in at least the next decade, so watch out for questions on the application being followed closely in the media?

Otherwise of course the Chinese continue to prefer the number of wealth ‘8’ in their phones and registration plates for the cars that are sold and you should avoid gifting them anything with the number ‘4’ thats sound like the word for ‘death’ and Morgan Stanley leads the list of suitors looking for a bear to hold as Indian markets sit pretty on last year’s prudent calculations still not outrunning the underperformance in sensex companies in the quarter gone by. Markets are headed to all time highs probably but the next target is 6350, steady as she goes..

A wonderful FNO pick on Tata motors reversed my earlier opinion of the TV18 guest who chose Tata motors again but as stock vols (option vol in current month series) closed above 40 the bid to range the 280-310 stock trade with a bought put at 305 on a strike of 290 as recommended should gladden many a margin accounts. The strategy is brilliant only if when it opened this Friday, the bids in the normally not so liquid stock family  would not have quoted the ratio spread at a profit. Buy three puts at 290 at today’s open and sell four 280 puts in a minor tweak to the strategy played on the network but you could leave it a t 1:2 as well

Do write to us above and link in with your blog / facebook page in the comments. 2013’s dull exports and consumption story for India in the meantime cannot stop cosmopolitan urban India from turning Jiading(F1 track) and Pudong (Shanghai) and Lavie and “Caprese” luxury bags with Gucci stores springing up here now much after China’s $15 b market accepted them despite our protestations to the contrary .If not the Chinese predilection for lucky numbers, one could still catch a fancy to under-reporting ages , the ilk spied upon by Jug Suraiya on Page 3 in his TOI op-ed of today

ITC results should be eagerly anticipated and with infracos back in demand together ITC and IDFC will garner a lot of new outstanding demand volumes ( open interest) esp as JP Associates has completed a first rush yesterday to 80 on the futures. Sun TV is much better than Satyam though but both are equally risky on corporate fundamentals after the corporate governance in churn in either of the scrips. Sales of $1.6B at ITC in the quarter reflect the last of the big consumer companies making a sustained comeback after the jump in Q3. Europe based consumer goods giants including Nestle, Diageo and Unilever have already been singled out for investor attention in growth deficit hungry Europe for their stronger Asia businesses (ref FT.com, subscription required)

The New Drug policy is out though impacting margins at Pharma MNCs and Cipla & Lupin will also trend down on the repricing of margins across the board.

The main topic on this busy day could still have been the new RBI trend policy established by the WPI falling below 5% and the CPI having come in earlier. Though loath to check the sub indices this morning i see a Core inflation at 2.77% near all time lows and I do not believe we have seen the last of food inflation though April did not get to be a major run on the home makers’ wallets.

10 Y yields on the new bond have already responded vertically to near the 7.25% mark and thus RBI will take the whole term down immediately in the next three-four months before growth actually responds, likely leaving the rates below 7% forcing banks down on deposits despite the flagging demand and without more than a signalling cut in CRR. The news of more cuts was however the most important one behind Thursday’s heart of a rally.

 

RBI policy announcement May 2013: Repo rate cut to 7.25% CRR unchanged

Yields on the 2022 bonds moved down 5 bp to 7.77% in pre policy trading and kept the gains as RBI announced the expected cut of 25 basis points in the Repo rate despite macroeconomic concerns in a bid to sledgehammer the supply side weaknesses that have disabled policy transmission and kept illiquid markets near the marginal standing facility rates and the higher reverse repo rate which correspondingly moves down to 8.25%., The RBI emergency lending rates (MSF) are exactly 7.75%

The response follows a weak macroeconomic assessment yesterday and the hawkish tone though warranted has brought markets down to 5950 levels. markets correspondingly ill understand that “RBI has played true to form” *(ET lead on ET Now) and finally keep the faith in the economy after having been ebullient on the expectation of this rate cut. RB has cut the growth forecast on the GDP in this fiscal — FY 14 to 6% and inflation target is a 5.5% for this fiscal. The Macro review also highlighted that CAD is likely a risk till is funded by external capital flows (read new foreign debt)

The presser after the announcement focuses on the issues of liquidity and continued omo support from RBI

 

India Morning Report: Markets horrified by ‘unaffected airs’ slip back to keep rate cut

English: Logo of Bharti
English: Logo of Bharti (Photo credit: Wikipedia)

 

Markets sit on a big slip as they await the 11 AM announcement of policy rates and the afternoon meet the press with bankers. interestingly this is the closest to near unanimity in market expectations held together by all stakeholders including different institutional and brokerage based analyst teams on research and bank economists and other commentators that the RBI will be giving a 25 bp cut after inflation has fallen in line and the need of a stimulus is par for the course. However, the likelihood of the unlikely event is still finite in that no one expects the Central Bank to ignore the macro weaknesses and so far the prudent fiscal path is not more than a promise either. To cut the longer story there short, the question of the RBI not following through has really made the sentiment jittery(threatening?) ahead of the announcement

 

Interestingly GMR to take a infraco on point kept its head above water(closed positive) while the Anil companies celebrated the gold rush with the rally peaking above 6000 levels and Bharti’s deal today for 5% equity (new, post issue stake 5%) to be issued to the Qatar fund or other events like results are largely being ignored in the morning session. The session’s preparation for the q-case of the Central Bank not conducively incentivizing the markets thus means that the rally is still on and will not breach 5800-5900 levels on the downside after a sharp derisory devaluation of the PER of the indices today. The optimism on the surveys has however like us in the past led to a forecast skew towards the right with the india positive commentators opting for a 50 bp cut signal from RBI

 

Regardless of the bank policy announcement however, its outlook will remain cautious till the end of this quarter bu t may include data to prove reasons for becoming bullish from July 2013

 

 

 

India Morning Report: Here it is, the day of the bounce back

Of course, we are still correcting to a lower range and I would even think the market could now top out at 5850 which would be dangerous as that would probably break the market uptrend for good.

While some of the unsure network analysts playing safe including Mitesh Thakkar on ET have opted for upticks in Wipro and Lupin, I would rather the markets are indicating secular break from the vote down mid week and banking and autos would lead the comebacks.

English: To Munsiyari on a Maruti, Uttarakhand.
English: To Munsiyari on a Maruti, Uttarakhand. (Photo credit: Wikipedia)

For the markets to sustain on its strengths now that India inc has discounted the political storms as no more than the morning cuppa, it should retrace higher than 5950 and thus the afternoon session or midweek next week could again see this morning session being negated to start from a better ground but around the 5600 mark only.

The bull picks in M&M, Bajaj Auto (Sukhani, TV18) and Maruti would be the big winners and ITC IDFC and ICICI Bank continue as bedrocks of the long portfolio. HDFC Bank seems to be still battling issues of Foreign limit being exhausted but is up in this mini trend while the short on DLF (Sukhani, TV18) is a great pick as the markets finally do not want to take a directional trend in the remaining series and battle overvaluation in the remaining scrips.

There is no solution for India’s daily challenges but it is to a degree, the sustainability that comes from middle class and bureaucratic institutions and cultural mores that keep it going and keep business and pleasure immune from political and social pain.

Financially, forcing RBI to cut rates would only keep the fixed income markets moving higher on yield especially as there is a fracture between the higher floating yield curve’s tough love and the macroeconomic indicators actually pointing to growth that remain bereft of real investment support while neighbours and not so young markets like Thailand and Turkey stay with carefully worked out long only bets sweetening the long only trajectory of economic perspicuity that was associated with India for some time.

The short bets in the March series should have been closed in yesterdays pre closing session and no new shorts in options could yield much as the time value of decay takes prominence this week. However, though it is non intuitive, a sell in 5600 puts is likely to be the strategy gaining coin the rest of today and Monday, esp if you are willing to wait out expiry on March 28. Selling calls would build up above 5750 only.

Bank Policy Tuesday: DMK steals policy limelight, Rate cut hopes of India Inc

Though we did not suspect the political mulligatawny soup that will lead to a face off in the Parliament on the Lankan Tamils issue and should in fact be used by Indian polity to align to US on this issue and come down on belligerent China friendly Lanka, the very least done today in the political arena with the Nifty barely holding 5750 and yields hardening closer to 8%  has been the virtual throwing away of the monetarists wheel in what can be educative to all large economies hoping for moneteraistic target based Economics to bring home the citizens out of the global crisis of growth overtaken by stagflation.

RBI allowed another 25 bp cut in Repo rates to 7.5% and though it seems pat following fixed yields early 2013 move below 8%, it removes any further room for easing for the Central Bank. Cheap RBI lending thru the LAF should have already impacted yields to move down as inflation remained in control. LAF rates are now 6.5%. RBI has also posited the MSF as bank rate at the upper end of the channel in the mid term review. India’s GDP growth was the lowest in the last 15 quarters at 4.5% in Q3 of FY13

The Governor meets the press at 2:30 pm.

SEMI Breakfast - Fixed Income/Credit Analysis
SEMI Breakfast – Fixed Income/Credit Analysis (Photo credit: ceonyc)

Rate Cut Economics

The bank rate cut to 7.75% was already an avoidance response to the  Type II error of over tightening the monetary turf by the RBI which is already conducting large OMOs to provide continuing liquidity. The last one was just this week , the 3 day repo accounting for INR 1350 bln. In real terms rates have only risen after the last rate cut announcement in Indian Fixed Income markets despite the appreciation in the Rupee and counting today’s rate cut of 25 bps thats 50 bp of rate cuts shouted out by India bears waiting for the debt trap that India Inc could never be. Indian credit stock instead still remains the lowest in Developing and Advanced Economies globally at 75% of GDP ( both data points in this argument have come from this week’s RBI data releases)r

The Challenge ahead

Despite the 30% growth in NBFC credit this January (based on RBI data released for segmental review of bank credit) credit growth will likely challeng e the 16% non food credit target. In market terms(equities) , though 5750 levels are holding on the Nifty, expectations have definitely been turned down three notches after the violent 100 point mid day reaction and as profit growth eludes and food inflation rules the rest of 2013, real income growth may finally turn out to be a mirage and bring down curtains on future consumption growth for the nation as it dives into political uncertainty. RBI rate cuts could have been avoided to keep the market discipline better in later months when the fixed income markets would have been in situ better able to target a downward slide in yields and keep ahead with higher growth enumeration as non food inflation instead of staying low now tries to bite back with global demand improved by China’s lot However all that still means India grows by 5% in FY13. The lower data of worse cases for FY 14 enumerated above are still low probability events and can be easily avoided though these downside risks should also blanket any other global downside risks.

Foreign investment flows

India remains a global island of relative comfort for investors engendering continuing foreign investor interests that should as posited turn positive as the global downside risks emerge stronger esp for Europe and competitors like Korea and Singapore (affected by the China story) get bit while others like Thailand may still not provide the required depth to global investors. BRICs and N11 stories have at one time or other shown how executive decision can help them pull past the Indian jugger naut and India needs to be better positioned to respond in global markets thru joint policy and private sector action.

 

Related articles

 

Bank Policy Tuesday: 90% expect a rate cut. Sorry, says RBI Governor. India wins.

Despite the political improbability of this being counted as a standoff by the understanding P Chidambaram, this will be the most advocated course by us as Indian Food inflation starts into gear and despite non Food inflation now being below 4% the banks’ predisposition to trust their models earning a good profit in such rate cut cycles and the lack of transmission of last rate cut to bank rates across the board means the RBI governor will have more wiggle room later if he leaves rates untouched.

That is some simple policy math weighed in by a outside in look at the markets busy in the ranged groove. Market economists are hemmed in by the lack of bullish global prospects despite a healthy prognosis for 2013 just two months ago. CAD remains dangerously teetering on the brink and can easily be held hostage by Oil and other imports. Gold imports  have not been capped off. Fisc parameters have not been resolved.

Indian markets have showed the same audacity for a bullish candle if only they  were allowed to bully the experts and the pragmatic Duvvoori Subbarao. Most experts thus have agreed to a rate cut tomorrow as more likely but have correspondingly cut down on the wiggle room for growth in even 2014 and definitely the rest of 2013. While Bank Policy could traditionally go for a rate cut now, the only room it will have in the future is to nod sagely and say ‘we told you so’. The 6.8% WPI is no measure of the 11% CPI and never the twain shall meet.

This is not the last stand for central bank led monetary policy however and if rates are indeed not cut now and market forces continue to engender the positive turnaround in IIP , the Q3 policy in December 2013 could look much more positive and we could be near a good take off point where consecutive cuts could then support growth. A 10 Y yield at 7.75% therefore is no bad news and the guv has all my good faith support if he lets the rate cut go unannounced tomorrow. 

India Morning Report: Why not a 50 bp cut now, and is Glenmark the new blue chip

Does Rao have room to cut rates

 

Yesterday’s hawkish review ahead of today’s policy meeting and announcement was very clear about the CAD reaching 5.3% with another reduction in the Central Bank’s conservative GDP pronouncement. However, inflationary pressures have ebbed and since the Central Bank realises the importance of doing away with the spectre of a recession, now hinging on a rate cut with Credit growth stuck at a low 15% despite the gap from Deposits that grew 11% in the week ending Dec 28.

 

That it does, also means that the rate could well be a good 50 bps, accelerating the dissemination of liquidity and growth from financial easing in the Economy and allowing RBI another breather to study inflation in detail over the period till June when the next rate cut would become due. one wonders though if like bank desks have forecast, India can actuall live to the top of this Economic cycle with only 100 basis points in cuts or even 150 bp till March 2014

 

Axis Bank Mega QIP garners $2 bln

 

Axis being the speculators’ pick for arbitrage and weightage balancing on both Nifty and Banknifty,    the effects of its improving fundamanetals with a large $1-1.5 bln Capital infusion are going to be important momentum providers to the Nifty and as it fortuitously looks like it will not result in Cats and Dogs moving up with both Educomp and Jubilant foods lying low ( the latter having lost its coin purely on speculative traders’ dime), it would mean longer term Capital taking over some of the remaining float at Axis Bank and others in thelarger Mid Cap categories like Yes Bank ( who have changing ownership on the FII ‘float’ as a downside risk after having Rabobank exit)

 

Glenmark Pharmaceuticals
Glenmark Pharmaceuticals (Photo credit: Wikipedia)

 

Glenmark reports Q3 results on high expectations – ‘Enriching shareholders’

 

The deep pipeline at Glenmark with 46 ANDAs to go in the US market and 82 products already authorised its growth at double the industry rate fof 12% in the first nine months of 2012 ill only be exceeded by itself again in this quarter and lead to probably a count in the Top 10 pharma companies and even the Top 5 in the foreseeable future.

 

A healthy 25% of the portfolio seems to be domestic market driven and unlike other market observers we do not believe such 35% growth as it achieved in India in Q2 is likely to be beaten by others in the Industry depending on new compulsory licensing and expensive generics for the Indian market as portals for explosive growth

 

The domestic market remains likely to reward Diabetes solutions and normal OTC and low value prescription medicine manufacturers with volumes and growth from the current pathetic $2.5 B mark in 2011-12 

 

Glenmark pharm in the meantime is prescribed for having broken the barriers with consistent 20% Topline and 30% Net profit growth parameters.

 

 

 

Bank Policy Tuesday: Nothing can be done for now, Markets react

 

As we mentioned, the markets had decided for the bank last week itself and while it was clear the rate cut was not recommended the market is in position to react unfavorably letting commentary focus on  “hawkishness” of the policy (just listen  to LV on TV18 carrying on live from the dog and pony show) which is unlikely its tone.

Banknifty is down 100, supports for the Rupee sunk in the melee and Nifty don 20 points. SLR has been cut 1% finally after 3 years of dilly dallying. that means with 23% SLR and 4% CRR banks now need only 27.8% in Liquid government deposits and with borrowing from the government already reducing the liquidity will improve albeit slowly as these are sticky deposits. India’s GDP  growth is likely to come below 6.5% and inflation is high according to the policy review.

I am wondering if my short Dollar position will stay in the green in these conditions against the Rupee with markets using every such excuse for running it down and are virtually uncontested in that. The RBI reference rate to the Dollar will move up today. Inflation target is now 7% and credit growth targets are above 18% wiht most of the big four affirming a 20% year

 

India Morning Report (June 13, 2012 – Pre market Open) Already discounting the rate cut (Incl. Fixed Income Report)

indian equities started off a rally yesterday to upturn its nose to ratings agency S&P for daring to suggest India was closer to a downgreade two days before IIP announcements and a week before  RBI policy is expected to be announced.

Surprisingly, even naysayers, including us in this cycle who thought RBI need not cut rates now have been silenced by the intervention from S&P. While fortunately there have been India Bulls that have defended India saying this is the bottom of the barrel for India’s raft of bad economic data in the last six months there has been a precocious turning down of yields in the fixed income markets pointing to a massacre on Monday if rates are not cut by the RBI.

India 10 Y yields are trading at 8.06% having started the week at a low 8.14% from before the S&P announcement, thumbing the nose at Cassandras of doom. Again though not unsinged even in fully hedged trades, I recommend staying away for this entire rally in terms of ne positional trades and let your existing holdings and positions enjoy the sunlght till the RBI policy hour as expectations become clear.

Though it has not been opportune to say that Indian Capital Markets are thumbing a nose at short-term flows from India oriented FII investors at these high levels (FII also took positions in January to INR 450 B) it is foolhardy to stop the market to its 5400 levels as the underlying fundamnetals have not changed for India despite the statistics.

Yields are likely to stay below 8% and the standoff ith the RBI trying to absorb more on the existing 10 Y bonds turned out to be till only an absorption of INR 900 B on the 10 Y bond released in November, now having gone for the new 10 Y paper with a coupon of 8.15% Traded vbolumes in the G-Sec market doubled according to a DNA report

Also seemingly RBI is still conducting OMOs to enhance liquidity and the new Government borrowing programme is as much a challenge as ever despite the liquidity conditions being better. That hoever means the Rupee will start trending up firmly after Monday again keeping the impending correction in equities away but this week may trade weaker esp today’s continuation from yesterday’s Dollar rally as the Euro gets extinguished again overnight.

INR 18k crores windfall for PSE banks

18000 Crores capital added by government

$3.6 bln has been promised by MoF to fund state-owned banks immediately after the budget to facilitate ramping up the Tier I common/capital ratios on the FY2012 balance sheet. SBI was promised INR 1.6 bln or INR7800 crores

ECB/FCCB funding welcome

The Israeli branch of the "State Bank of ...
Image via Wikipedia

Meanwhile, the changed fortunes of the rupees could not stop ECB/FCCB borrowing as $4.46 bln was mopped up in December on top of $1.58 bln in November.of this $2.7 bln is project based on automatic route across 90 projects , small QIPs of less than $3000 mln from mid cap and large corporates

2G Licenses

The entire $2 bln ( INR 92.6 bln) funding for the 122 canceled licenses was funded by syndicates led by SBI and PNB, both will thus claim the $2 bln refund fromt he government. Telcos pledged the licenses with banks to raise the money

India Bond Impact (Fixed Income Report) : Not RBI, but bonds try to get a depression prognosis

Fixed Income yields keep falling off a cliff while liquidity is managed with the year long rally in yields chopped

BOMBAY MINT Post Card
Image by BOMBMAN via Flickr

below 9% even as emergency liquidity’s few dollars keep bonds from staying east of the channel corridor mandated by RBI with the marginal lending facility  currently at 9% for banks.

The drop in yields could not however encourage RBI to force rate cuts sooner as these yields remain in a thinly traded market and neither borrowing costs nor lending rates for retail or wholesale tranches are nearly being effected apart from Treaasury gains ahead of March 31

RBI has been allowing the use of excess SLR for the MLF (MSF) emergency window since the last 3-4 weeks leading to the unwitting capital appreciation in bonds since November.

Why liquidity should not be banks’ poison (alone)!

Central Banks worldwide, our RBI included are busy providing Reserve Requirement cuts and Emergency liquidity mop ups to ensure inter bank market fluidity and avoid a situation like for Italy and Belgium, Spain and others last November in Europe.

The ongoing Euro crisis is not just the cause of this drying up, but in fact few would probably bother to

English: The logo of Deutsche Bank AG without ...
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remember that 2008 was a result of this extreme loss of liquidity. why that happened and why banks are wrongly considering themselves only for the liquidity charter or seedings is that inordinate rush to fund the entire banking assets with inter bank overnighters. RBS included 70% of Capital from short term sources when it went down in 2007, Lehman did not get a Fed licence to add liquidity as Capital for its next balance sheet when it ran out of collateral in September 2008.

Deutsche Bank and BofA are still selling assets to add capital back not because the bar was raised by the governments to Tier I capital but in these cases just because they relied entirely on overnight markets ( BofA means the investment bank with a banking licence in Merrill Lynch too) and after sales of $50 bln in assets, the bank still needs another equal amount from non available Capital to survive.

Deleveraging thus is as much a response to clampdowns on use of inter bank notes as long term capital for Basel 3 requirements as anything else. Above all behind a well regulated bank, pointed out by Menaka here, is the new realisation that you can’t leave on the neighbour’s bread all year and need to absolve yourself of the charter to provide continuous liquidity to markets. Banks should focus on long term lending and matching sources of funding to the tenure of the funding they do than just sit on liquidity windows pressuring themselves and the banking system.

Also as we mentioned in our popular series in October and by Simon on WSJ

 Banks currently hold capital well in excess of regulatory standards, but that is due to pressure from markets, not regulators, who gave banks until 2019 to meet the new Basel III rules. There isn’t much point in regulators extending this deadline, and it would probably undermine confidence if they did. Reducing capital weights on business lending might help but is currently illegal under European law.

Happy Thursdays! Food inflation corrects

The 14% contribution of the food inflation may well bring cheer to the WPI number as Food caught a -3.36% score for the week ended December 24th to bring primary articles to 0.10% from a low 3% number last week and fuel remained suspended at 14.6% for another 25-30% of the basket. Everyuthing else in tow, Foreign inflows should make it a memorable 2012 for India but our local interests and trades of high volumes seem to have caught the index midway to the bottom. Actually there is perhaps just 15% left but one having to agree at

US-Inflation-by-year
Image via Wikipedia

these rates and settle down with MTM losses on my 10% risky allocation to the emergin g market play is hardly going to be the likely scenario so one will have to wait considerably more for furious inflows into equity even as markets catch a break below 47 and promptly lose it at 4750 over the last two months. Not a very good advertisement for foreign and local investors.

Of course QFIs have been welcomed, buybacks allowed with direct auctions on the exchanges to bring equity to a 75% cap and individual investors allowed to enter Indian equity exposures from January 15, following on the ealrier invitation to Individual foreign investors in mutual funds. NO one expected an immediate surge but if that is because of no printed word on the how and why, the regulator should have no problem obliging witht hat as well.

RBI is admitting that we need more FX buffers now as companies have picked up large amounts of short term debt and while the rush to repay is on and amany with good governance have survived the MTM losses massacre before it began, India’s current account may already face a stretch to buy the oil it needs every other month

India traders playing in CDS denominations

It is clear that new found love for CDS has empowere India’s move into the mainstream Asian trading markets though RBI has made it clear it would not allow NBFCs to write CDS contracts or short or encourage any “default” underwritten by a CDS contract. This should be direct Net worth criteria instead of class as banks or companies allowing treasuries to play with both sides of the CDS contract. CDS spreads and profits on trade rise when default rating risk increases.

A writer gains when the country’s / corporates’s default rating risk is seen to increase, just like a  buyer or insurer gains when default risk is lowered

Happy Thursdays! Another week, Another crash

Bank of America on the other side and lately some banks here have started looking happier only on days when the market has crashed beyond expectations, making these a regular weekly feature of the market. Though Bank of america has been outwitted by the Euro and will bleed for more time, the india markets and its new found drerivatives losses will bottom out in the next 200 Nifty points as new suspicions emerge on prop trading desks at the end of the local’s route in Mumbai.

Food inflation plopped to below 2% this week and I suspect more higher numbers are stillleft in urban consumption items like fruits and vegetables in that even as the food subsidy bill gets closer to becoming a law. RBI’s FSR was also lined by ratatouille chameli and tom cruise bacchchan as having brought lasting relief in real estate seen by a three hour long rally in DLF, Unitech and HDIL among other strange asteroid fragments in the troposphere currently.

The Air train between Delhi and Mumbai saw Cyrus Mistry in industrial grade discuss throwing with our own MOFCOM with Ratan Tata fadng away in another 12 months, discussions on VSNL land patying up taxes becoming more insistent ( oops, its Tata comm now)

The end ( of the bear rally) is near in India’s case (please do no tbuy before 4400 is broken to a new low)  and my portfolio of trading plus investing is usually a good leading indicator ( from lounging on the sofa awaiting employment)

Our post on the bond Report will show banks using the MSF and yields staying down as the last experts get entrapped into thinking the Bear has finally come to India, Asia being the land of the eternal Bull panda.

India’s economic contradictions show up, infra investment remains slow

Equities trading near lows, derivatives including the PCR has moved on to a low 1.05 showing that the down move in equities will be limited. However after Friday’s trading at 8.55% yields are already further down to 8.47% very encouraging to the RBI Governor to begin rate cuts in earnest  and there in lies another potential breakpoint for the market after policy announcement on Friday as rate cuts are unlikely to play into the Indian story for another 4-5 months., inflation drops well in progress otherwise.

Moodys’ and goldman Sachs ( Jim O Neill) have already sounded dire Forex payments warnings  with retail FDI having counted as negative. India’s fixed income exposure outside continues to look healthy with recent outward and inward transactions of sizable value completed per expectations so we stil have time to repair our outlook.

Apart from revisiting retail FDI , whence the six months figure of $20 bln in FDI could move faster in the

English: Logo of The Goldman Sachs Group, Inc....
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remaining fiscal, we also need to get our power sector investments going again. 2012 will be better for Fixed Capital formation as the new 5 year plan makes fresh proposed investments in its first year and briniging the growth imperative back could bring back the same additionally.

Fortunately, India’s banks are sitting on good capital reserves to accelerate credit where it is in the right stage whether for outward FDI or domestic projects thru domestic and International/PE equity. Infra structure projects’ longer gestation from the various Bombay Metro projects to the Harbor Sea link (Sewri) to be bid by Mukesh ambani and investors’ rejection of the same show the challenge ahead of us in investments in infrastructure as both fixed income markets and equities need to vcover short term returns to recover their higher costs for the scarce capital. 30 year capital can come to projects from private players only if longer debt is assured of better financial infrastructure apparently,else funding India’s $2.5 tln infrastructure gap and thus maintaining the growth imperative was well within our reach in 2011

Negative Gross Fixed capital formation after a dull 8% growth in the June quarter has skewed India’s relationship witht he credit agencies. It’s uneven relationship and the last minute slowdown when China is steadying ships is a confusing signal for the market watchers.

Unfortunately RBI cannot do much more right now except sing paeans to the success of inflation being in control

We are not alone in the slowdown nor we ever had any reason for our equity markets to be so optimistic in the last six months, but somehow we missed our growth imperative in 2010 and 2011 before being caught inthe slowdown, looking at the fall now negating our previous accomplishments rather than allowing us a wait and watch period.

India Bond Impact: Inverted yield Curve, inflation turns nose down

With inflation falling, the inverted yield curve ( 10 year yield a point below the short term 8.7% yield) could well be a good thing for india. the rupee depreciation could however keep imported inflation hot for India’s traders and manufacturers, esp as the Fuel basket is still up on the high ledge at 15.5% . The livemint Friday report has good data to back its inferences too, but even if we do not follow the RBI copybook ( playbook elsewhere 🙂 )  and set our own inflation target it could well go under 6% as and when Fuel also tackles the base effect. Prices have stabilised and bond market liquidity healthier as seen in the 8.7% yields at the short and long end a good 25 basis points below the yonder peak of two weeks ago.

For investors yields coming down on the inflation ride mean large inflows into bond and then gilt funds to shore up the neglected funds industry where AUM has dropped from 7.5 Tln in 2009 /2010 to 6.75 Tln this year a slow deterioration as all the bank rolled money for money market mutual funds was exited. For banks and large treasuries however, with the money market fund closed and RBI auctions likely to be discontinued, there would be a limbo while they decide where to deploy their idle cash for quick gains, perhaps in longer term Floating funds eventually

Rate cuts could come sooner, therefore the talk of recession as Capital4 author Deepak Shenoy highlights back in June could well be baloney. In our case inverted curves mean that banks can use that extra tey keep with RBI even if CRR cuts are not effected and bring back the short rate as and when IIP improves based on lower inflation. Believe me, no one else has the luxury of 40% of the banking system’s funds lying with the Central Bank anywhere int he world even if you could go back a hundred years thru the hyperinflation cycles in Germany and LatAm or the recession cycles in Brazil and Venezuela and Russia

China has a more well defined shadow banking system, our own professionals torn between the brand of organised businesses and stock markets and the penny pinching savings they need to build a home nest. We still have a cash based economy like Italy’s south which will apparently keep adding to our tax basket at its own pace regardless of how many investigative journaliusts or how many amnesty schemes are created and expired 56 new tax treaties later there is no inflow from that system into the economy and our taxed remain the lower percent population of the country. Typically, these factors influence the fixed income market which moves on the supply and demand of money, but that shadow cushion in China and elsewhere ( incl in Europe where it has yielded  a15% tax on Swiss deposits) is much more in control

India Bond Impact (Fixed Income report): RBI purchases ‘ominous’ to another 9% bout

stewart, mena, SCOTT?!Though a late market rally on Friday has taken away the gleam of an easy short for Monday, short covering in the last hour may also add to those planning to cap the trading range with a few swats with the bat.

In bonds however, the easing of yields to 8.75% is not so certain either as RBI’s bond buying program was an even closer 8.69% in yield in the buying of nearly $1.5 bln yesterday. RBI rates are 1% lower by channel defined even though RBI charges a 50 bp spread on its MSP sales in the middle of the channel. the yields are closer to last weeks sales Auction by RBI which were at 8.94% and so the yields may move back to that near 9% mark again before the Rupee tops out.

Smart rally in the rupee though, again speedingup the trend to a big spike, leaving you with less doubt that it will return to lower marks sooner than later. consolidation above 51.50 levels near 51 would help people believing the rupee lost mire than it deserved. Remittancees likely to be heavier through 2012 were heavier only in geographies like MENA from our labor exports and not the managerial variety yet ( if it can be distinguished)

Inflation cannot get better, however China actually got it improved to 4.5% before it eased rates and put the brakes off, risk on stride into the Economy, lasting till December after throttling started in June itself.

India Earnings Season: A good jump start by Keki Mistry’s HDFC

The HDFC India Homes Fair
Image by Kaustav Bhattacharya via Flickr

An almost vertical 33% rise in Sales to a $800 mln ( at a temporary $1=Rs 50 average) from $600 mln last year in September, and its exemplary 4.3% NIM at the Industry defining low LTV of 70% brought home HDFC a bonanza of chips in a game of consistent upending of Industry challenges with a captive home loan customer base and assets of Rs 1.27 tln from 1 tln reached last year at the same time

September RBI data according to BS showed a growth of 6% in deposits and only 3.4% in credit while even in the US credit grew at 6.1% in the same period. Thus its borrowing rates remained a cool 228 bp lower than its higher lending rates as well. Results season for Indian banks and financial services comanies kicks in completely by tomorrow morning when IndusInd reports growth in credit and retail banking profits, expected to be another 20% as for the previous quarter. Average rerating of banking prospects in the subcontinent is looking at sales growth in credit remaining just below 20%

Infosys kicked off a new bullish trend with good results last Wednesday and TCS may pitch in with margin expansion as well even as recessionary trends in US and Europe are muted by a vertical 9% fall in the value of the rupee in September

A hike up the yield curve is back on the agenda

I'm not entirely sure what the umpire is signa...
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..with so many idle hands on deck, exemplified not just by mid senior unemployment but also by a cash reserve of INR 4.7 Tln as studied by ET and a 200% rise over 2010 there is a lot of going back on the threatening tones adopted with RBI last month. With inflation at 10% levels consistently, the longer yields have already responded, and with monetary easing in fashion inculcated by the US Fed, the market is likely to take a steep hike in yields on the long end till the effects of the easing are finally dispersed and interest rates clampdown can have an effect.

If you see other nations reducing rates, Brazil is the example which should be valid only as it has too high a watermark even at the current 11.5% and at least 2 rate hikes are required before it reaches the levels envisaged by india at the peak. I would stoutly defend RBI till our rates reach 9.5% to 10% as inflation refuses to climb down and expect many more to defend RBI hikes in the coming weeks.

Also, maruti and Reliance performance could be used as an example of how things have gone wrong with India inc and at that time, easing rates may not be good policy for us just to be in line with Brazil , Turkey and indonesia. Israel’s behaviour is always more in line with developed market estimates and growth is a challenge where Indonesia is just trying to blind side investors and policymakers alike with its eagerness to follow first into rate cuts. Neither china nor India should respond to these measures or even treat these as pressure as interest rates in Indonesia (6.75%) or Turkey. Turkey did get a positive response from reduction of rates around the 6% level itself but one must understand its response wis likely 5 times that in India given its nearness to Frontier markets or its newness in FDI regimes and the geo political overhaul committed there in the last one year and India cannot really follow into that policy regardless of the heartburn it has caused to Walmart or Starbucks and other remaining FDI candidates unable to enter indian markets in the middle of the festive season

Foreign Banks in India: The HSBC RBS Private Banking Sale

ABN Amro Bank in Dubai
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RBS had committed to HSBC towards the sale of all its 31 branches and 100 retail / wealth staff to HSBC. It is yet questionable if HSBC could have absorbed all 1800 staff which continues to operate as ABN AMRO in the country since License transfers are a throny issue that from the point of view of the regulator should not have risen as the occasion to sell in each case is in question.

Since the deal signing in 2009/2010 when ANZ lost to the HSBC bid in India and Malaysia, there has been speculation peculiar to the Indian regulator’s national requirements. None of the speculated objections have yet been resolved, additionally with RBS and ABN planning to come back to the country RBI has taken a harder stance on this apparent tomfoolery with buying and selling branches and networks . Among the first nonsensical results of immediate interest to RBI would have been the multiplicity of licences for the acquiring bank and the lack of branch approvals for HSBC once it as acquiring bank had surrendered the second licence per law with RBS. Even before the assumed non-event (buyers/sellers) though RBI has now found itself troubled by the fact that RBS wll continue to live in the country in isolation as also ANZ ( in its TV appearance by CEO Mike Smith on Bankers’ Trust – B-UTV) plans to remain only in institutional business in India. ANZ, ICBC have one branch each in the new avatar, the most planned by RBS in its new role as a exclusively wholesale player in the country.

Media reports make it clear that RBI has made a unitary objection on the sale – that of the 32% priority lending commitment which precludes any option without retail branches and in factas the new charter sugggests, new branches in Tier 5 and 6 town.

Priority sector requirements are not new and all the 32 license holders in the country manage the same lending requirement without their own branches in the rural hinterland. Obviously those wholesale approaches are not the objective of the Priority sector lending regulation.

Global evidence of parochial regulation

India’s own ICICI Bank is curtailing international deposits in most geographies as local regulators want such deposits to be ringfenced for local disbursals. This instance is unlikely to be an isolated one and a ringfenced national structure is already mandated for most banks but expensive to execute. The Indian regulator per force is under pressure to clarify  and safeguard India’s interests in terms of adequate capital for local operations which has been found wanting by banks as they feel strained by restrictive voting and limitation on branch licenses among others, as also their inability to compete with Indian majors in retail footprint

The Original Sale

RBS sold the ABN AMRO business it acquired in the country while keeping the Global Banking and Markets Divisions along with the Global Transaction Services it acquired from ABN AMRO headed by Meera Sanyal.

BS of July 03, 2010

RBS’ retail and commercial banking businesses in India house portfolios with a gross asset value of $1.8 billion(nearly Rs 8,400 crore) and have 1.1 million customer relationships, served by over 1,800 staff through

31 branches currently.

According to the terms of the agreement, 90 per cent of any credit losses incurred on RBS’ unsecured lending portfolio in the two years subsequent to the deal’s completion will be deducted from the $95-million premium to be paid over the tangible net asset value of the businesses.

 

This was later deemed to be a portfolio sale and RBS was not allowed to transfer licenses as the banks were not incorporated in India and were only branches owned by foreign parents The Stanchart offer for the same sale was considerably lower as it expected the regulatory run-ins to be discounted. ANZ that had earlier sold off its business to Stanchart in 2001 and ABN have planned a return to India in 2011 and again received licenses while being welcomed by their core consituency of customers in retail, do not expect to go beyond Transaction services and Capital Markets/Fixed Income / Syndicate lending

Other thorny issues still remaining to be sorted out thus the picture that emerges is the following :

1. Each branch still requires explicit RBI approval and none of the 32 players have been forthcoming in unitarily capitalising the India subsidiary for its leverage commitments as currently we all go by Internal Risk management approaches that count on a single Asia Pacific Balance sheet to sell loans to India corporates esp as the competitive advantae for us in Foreign banks is in arranging cheaper ECB loans and FC denominated swaps

2. Licenses being conditional to Priority sector lending apart , there needs to be dialogue between banks and the local regulator with the Indian operation commiting that it has the authority and the reach to complete all its India commitments and RBI observations. For example Swaps create unseemly leverage and banks do not resolve the same as per their own internal risk management where approvakls are already received?

3. Banks may feel stretched by the current requirements to commit 12 new branches in a year as are automatically approved with the 32 foreign banks surviving on 320 branches for their nearly double digit share in Indian banking assets and having avoided the changeover to WOS formats suggested in 2005 with INR 3 bln capital minimum . That this capital would have to satisfy basel and RBI norms on CAR locally queers the pitch for effective pricing for these banks and also in terms of global business sructures where entire regions operate on economics of large volumes that they will have to independently build in India.

4. The banks do remain commited to growing in India, HSBC for example and till recently Citi heavily recruiting in the country in retail and wholesale. Banks remain the preferred stock recriter of MBAs led by Foreign banks in India

5. A roadmap for ringfencing national operations has not been committed by BCBS ( Basel Committee) and banks have already calendarised ramp up of Capital per new standards till as late as 2016 (Ph II) and 2019 in view of the adverse strains on their global operations

6. Foreign banks have not been able to get RBI’s specific approvals for any request for voting rights beyond the current limitation of 15% though there is no such limitation on purchase of individual stakes by the banks. HSBC had earlier planned to stay with Axis Bank as partner but had to make do with the solitary ILFS Investmart purchase

7. New private banks are allowed FDI of 49% for 5 years and changes on voting limitations may be made in the Banking Regulation act as per demands. Many in pvt sector insurance also await allowing of increase of JV partners’ equity expected to be approved to 49% since the last 6 years but still hanging fire based on reform to holding limits acrossindustry per se

8. The impression of RBI as an archaic regulator somehow persists in the global bank offices as of last count in terms of capital commitments to India operations being recounted as Comfort letters provided proved to be of no later consequence for the banks

9. Even with local subsidiaries, RBI feels that Foreign banks commitment to the country is volatile with over 16% contraction in credit in 2009 and 8% in 2008 after reaching a so called “dominant” position in market share in 2007

RBI paper on Foreign Banks (2005) suggested a WOS structure be mandatory now for 0.25% of national banking assets or mor ein share (IIFL – RBI  paper )

HSBC global locations
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Living with high interest rates: How Banks will follow the script for India’s new growth – Part II

Pie chart of population distribution throughou...
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The RBI proposal for making a 100% WOS structure mandatory for existing foreign licensees is likely to get the tax man’s blessings if the diktat comes through form the MoF letting Banks bring in unlimited Capital for the new banking company without any tax implications. It still leaves to the foreign banks to set up such WOS structures that bind them to 25% branches in rural unbanked centers. In the draft for new banks for example I do not believe rural unbanked is the term used and they may be just llooking at setting up next to the HDFC Bank or PSB in the village/town when they do get down to implementation. Also with Foreign banks have partnered themselves in Insurance the FOHC/NOHC structure will be invoked with nary permutations to let HSBC and Citi operate for the projected bancassurance incomes in reputed cross sell revenue burst yet to be seen here.

However Banks will have a significantly larger play than just habituating Indian customers to high rates (mostly on loans), to mobile USSD messaging, UID enrolling for deposit accounts and mobile payments interfaces With RBi close to the curve on inflation there is much more rate hike in India’s future till we can outrun that inflation or pull it back(not happening till midway in 2012) Social programs in the rural hinterland may become more common and apparently more sophisticated than the public sector loan melas of the 80s

Swabhimaan inititive or rural unbanked villages claims 70,000 villages covered in 2011 till now, while NBFCsoperating int he country are being re regulated to level the playing field in terms of prudential and provisioning norms while deposit taking remains the purview of banks and those already having such a license in the NBFC space while allowing NBFC s access to SARFAESI Acto to allow recovery

It is the urban market increase in consumption which is a fertile grounded seeded by the Private and Foreign banks with renewed vigour. With underwriting norms slikely to be ofllowed diligently at least for some more months to come, the higher rates may not make much of an impact on consumer disposition with Cars and Homes hoping to come back to the top of the shopping list sooner than FY12 end in six months

Contraction in bank branches in the US however and in fact everywhere in the developed world where branch interaction has been a much lower component since more than a decade back, the growth in superstructure may be discouraged by the higher rate structures for the banks themselves. This is exemplified by the transaction charge difference of upto 5 times in a bank branch (40p) as compared to an internet only transaction(8p)  An Asian Banking report recently suggested that Internet transactions in Asia are more than 1 in every 5 transactions including large monolithic markets like China

Investments in risk process and Trading systems and platforms will likely take uo larger investments on the banks’ part yet. However, globally some larger operations in FICC and Equities may be looking for less regulated centers than the freshly reregulated markets in US, India, and China and global expasion to SE Asia’s frontier markets and Africa may well shift  the invesment locus from India and China too and thus Indian regulators would have to sweeten the regulatory pie they have to eat at India’s party for some time to come.

The ideal for banks right now is the renewed strength of income from the Wealth segments in Fee and Advisory income, investment income as well as financing the luxury goods consumption channel that seems to have been fairly robust during 2008 and now. Even if retial was to reach an average of 33% to 40% of the banks’ income statements it could mean large jums for the banks’ balance sheets and for India’s consumption pie. Corporate Banking and the likely revitalised IPO market remains the banks’ most dependable source  of income even with a more conservative range of products for the dle funds that have been the banks’ focus for faster profits to the clients and themselves

An HDFC Bank Branch in Hyderabad
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Setting up the NBFC Banking Corporation Part II – The Infracos will find it tough but so will everyone else

Setting up the NBFC Banking Corporation Part II – The Infracos will find it tough but so will everyone else

The infracos, REC, PFC and even IRFC if you believe the Financial Express have been tempted to start a Banking crporation and the current RBI chief Duvvoori Subbarao has been very clearly discouraging them. making their ask tougher is the new norms for recognising NPAs in a 90 day timeframe though power companies with no exposure to SEBs may not face challenges on that count as much as all of them will be preoccupied with analysts reporting a 5-7% downgrade in earnings according to the new NPA norms. There is also my own limitations of understanding as SCB research mentions that current NBFC ops are a big no no for banking wannabes.

Nothing in the current regulations precludes new banks from maintaining their NBFCs , in fact as the CXOs of these new banks holding companies are likely to canvas with RBI to allow their existing branch networks to become banking branches and that may very much necessitate a couple of public clarifications by the regulator as these are extensive networks in retail and will be the main utilisation of bank funds from low cost deposits of these banks in the first instant necessitating a relook at single party and group exposure norms and making it infeasible for the new NBFC banking corporations to set up new branches rather than refashion existing distribution networks of their NBFCs

The new NPA norms may hit the three Auto finance cos too as NPAs in the NBFC sector will now exceed twice the 2-3% Gross rate in the establshed banks. Also the NPAs are only a tough start as maintaining a 12% adequacy is already causing the new candidate banks a notional loss of nearly a potential INR 80bln or $2 bln in RWA and thus more than $200mln in annual profits compared to existing banks.

Also RBI’s interest in keeping PSUs and infracos away may be due to their existing development charter based on which they can issue tax free infraco paper to retail investors and also raise low cost monies to a higher leverage as discussed last year in IFC norms at this repository

The Risk weighting of Power industry assets is also specially marked down for the registered infracos ahead of the new banking regulations

The task of taking the bank public in two years most nessarily will be an unfinished agenda item unless the bankers want to sell equity while still aloss making concern, esp if they set up new branch infrastructure in which case For 10 new branches only 2-3 need to be in the hinterland and can function with skeletal staffing and a working mobile payments platform. this is much like at their much maligned broker cousins and with investment next to existing HDFC Bank and other players likely to make more sense immediately and in the long run making more ATMs available to the road weary urban traveller across India’s well connected and telecom upgraded highways and rail lines. HDFC Bank manages very well with rural branches next to agri markets from its acquisition of failed banks of 1994 vintage and thru fresh investments it made in rich agri catchment areas in Punjab

That is not necessarily extra burden on existing NBFCs as ong as they understand the importance of safe capital investments than leveraging too fast too soon as the guidelines have indicated for the way forward

Busy Season Credit Policy | Advantage zyaada

I hate writing influencing stuff for these ‘namakool’ government people..a true laissez faire capitalist as bollywood would say today – but much as I like to disappoint wooden leg intelligentia (sorry Saugata, not you) and unfortunate colleagues who cannot see the depth and incisiveness of my decisions ( only some times, as most of my followers and poachers would attest from the last 15-20 years, i have quite some intellectual property when it comes to establishing the kingdom’s fine traits and setting up the next wins. 

Well, this introduction is probably embedded into my names and branding choices as also in the discussions I have created across all Advantage zyaada properties, and while everyone has decided that the worst is past and we have recovered, the stock markets have finally got the cue,albeit from continuing discussions of interest rate when none are necessary unless a bank offers a loan.

Some of my better endowed readers who are also leader of men would appreciate that it is always tough to appreciate the RBI or the FED if you are in the US and ‘get’ the inner depths of what is happening, what is doable, what is to be said and what is to be communicated to which stakeholders all at the same time..that is why probably Duvoori Rao had no qualms in handing over the tough job to the ‘center’ or in this case the Economic Advisory Committee and Mr Rangarajan.

Let’s not forget that the RBI is doing a good job yet. With the Aussies having raised interest rates, it might have tempted lesser mortals to go in for rate increases right away, but we have just decided to raise the eponymous SLR a full basis point as banks continue to sidestep economics and lenders in each breath. The most laudable and really India thought centric piece of the policy was the important 150% ramp up in the provisioning of real estate loans to 1% of LTV carried on the books. It is a good reminder to banks that the costs of idle money will go up on both the treasuries and cash they keep ( a huge 35% in most banks, more for Citi) when the statutory rates even now are just 30%. In fact costs will also go up on the RE portfolio they are so eager to cultivate by a good 70-80 basis points, after all the entire provisioning concept for banks is based on being able to sell their collateral in case of default 🙂

However, next quarter we are suddenly going to get a flurry of results which proclaim greater volumes, no one will talk of pricing constraints, FDI will flow smoothly and I might just get time to read Ranga’s economics to take this slow elephant further. And that is how sand castles are blown away and not made into glass, nor kept for posterity. A mixed metaphor, maybe? But it is clearer now that the RBI is just battling select ‘investor guarantee’ holding bank companies that have never advanced adequate resources ( neither people, nor journalists, nor the money) to India as they reinvent the new way to leverage their own and their host nations ( i almost sound socialist there, but i am laying out the real hidden map where I share economic prowess in predicting the next turn and getting done with the rest of influenza to focus on earning real moolah in a real job / business)

Coming back to the policy, it is a non starter, because it is a tired ramification of pending business like flowing credit and reforms undone by a crisis. The banks are prudent enough to lend only to profit making businesses and the governments are out of money to print at the mint, The government will continue to be the biggest borrowing program, the agrarians will suffer as rabi prices rics and production drops off,  the corporates will bide time as India’s holiday season is past though the stats are still due, and the RBI is not handling the fun, neither the EAC by admitting to any innovation. In my eyes, that will slow up this pack of hounds till ( probably just next week, probably just good news) some great FDI and energy releasing decisions come through.  The next RBI ride will last the six months it can raise rates, but finally we have to start signing some good deals and get business done. Simple innovations like co-opting banks in the policy making and making obvious your support of public sector banks with larger balance sheets have to be reflecive of the new media and the new pace of competition where everyone is now ready to drive home their point to their investors and their stakeholders.

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