|
Outlook for March 2010.
| Economic indicators |
26-FEB-2010
|
31-JAN-2010
|
Change
|
| Rs/$ |
46.08 |
46.18 |
-0.22% |
| Forex Reserves ($ bn) |
278.672 |
280.955 |
-0.81% |
| Oil Price ($/barrel) |
79.66 |
73.35 |
8.60% |
| Gold (Rs. / 10 gm) |
16,755 |
16,270 |
3.0% |
| FII Fund flow* |
21,137 |
-11,358 |
32,495 |
| MF Fund flow* |
-7,177 |
-13,113 |
5,936 |
| DII Fund flow* |
13,444 |
122,220 |
-108,776 |
| (DII – MF) fund flow* |
20,621 |
135,333 |
-114,712 |
*INR mn
|
JAN 2010
|
DEC 2009
|
| Monthly Inflation (WPI) |
8.56% |
7.13% |
| GDP Growth |
| 5 Year CAGR |
FY 08 |
FY 09 |
| 8.80% |
9% |
6.70% |
| Benchmark Returns |
1 Y |
3 Y |
5 Y |
| BSE 100 |
93.94 |
10.30 |
19.38 |
| CRISIL Bond Index |
4.24% |
6.73% |
5.49% |
Equity Indices
|
26-FEB-2010
|
29-JAN-2010
|
% Change
|
| BSE SENSEX |
16,430 |
16,358 |
0.4 |
| S&P CNX NIFTY (50) |
4,922 |
4,882 |
0.8 |
| INDIA BSE MIDCAP |
6,398 |
6,510 |
-1.7 |
| CNX MIDCAP INDEX |
7,167 |
7,202 |
-0.5 |
Global Indices
|
26-FEB-2010
|
29-JAN-2010
|
% Change
|
| DOW JONES INDUSTRIALS |
10,325 |
10,067 |
2.6 |
| HANG SENG |
20,609 |
20,122 |
2.4 |
| FTSE 100 |
5,355 |
5,189 |
3.2 |
| NIKKEI 225 STOCK AVERAGE |
10,126 |
10,198 |
-0.7 |
| Fixed income yields |
26-FEB-2010
|
29-JAN-2010
|
% Change
|
| NSE Mibor |
3.35% |
3.30% |
0.05% |
| 5 year G-Sec |
7.59% |
7.15% |
0.44% |
| 5 year AAA |
8.59% |
8.33% |
0.26% |
| 10 year G-Sec |
7.89% |
7.58% |
0.31% |
| 10 year AAA |
8.88% |
8.69% |
0.19% |
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Fixed Income:
In the month of February, there was considerable hardening of yields observed across all tenors. At the beginning of the month, comments were made by the RBI Governor that the next fiscal year’s borrowing program would be similar to the current fiscal year 2009-10. This led to considerable apprehension in the market regarding the supply of government securities next year.
The rise in yields was further fueled by comments from Fed Chairman Bernanke, who intended to normalize market conditions by widening the spread between discount rate and fed funds rate. The Union Budget for the fiscal year 2010-2011 was presented by the Finance Minister on February 26, 2010. The budget stressed on the need to have fiscal consolidation without impacting recovery and aimed at an explicit reduction in debt-GDP ratio. Corporate bond yields moved in tandem with the government bond yields. The Indian Rupee appreciated to 46.08 against the dollar as on February 26, 2010.
Outlook:
The government has taken the first step towards fiscal consolidation by reducing the deficit to more sustainable levels in the Union budget for 2010-11. The government announced a fiscal deficit target of 5.5% of GDP for 2010-11 compared to a deficit of 6.7% of GDP registered in 2009-10. The government plans to achieve this through improvement in tax to GDP ratio, less than expected increase in overall expenditure and higher receipts through disinvestment and 3G telecom licenses auction proceeds.
The Budget for 2010-11 had both positive and negative surprises for the bond market. On the positive side, the gross and net borrowing figures were less than what the market was expecting. The government fiscal deficit at 5.5% translates into a gross market borrowing of Rs 457,000 crores and a net market borrowing at Rs 345,000 crores as against Rs 398,000 crores in the previous year. The Finance Minister also promised to do away with off-budget bond issuance for oil and fertilizer companies and move all subsidies on the budget as a cash basis. The negative surprise was the hike in excise duties on various goods including fuel. The excise duties hikes will impact inflation and thus exert an upward pressure on the yields. Bond markets will now have to contend with forthcoming supply starting April 2010 in an environment of rising headline inflation. Given these factors, bond yields are expected to remain under pressure.
We expect the 10 year bonds to trade in a range of 7.75%-8.25% levels leading into April 2010. We expect the inflation to touch double digit figures in the next couple of months and the Indian rupee to continue to appreciate against the US dollar in coming months.
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Equity:
Markets have remained largely range bound on the back of various forces countering each other. While economic data points continue to improve, global factors like strength in the dollar have capped foreign inflows into the Indian markets. Volumes dried up in the month of February as markets waited for the Union Budget. The Finance Minister’s stance of reducing the fiscal deficit while supporting aggregate demand through increased disposable incomes was well received by the markets. However, there continues to be skepticism on the Government’s ability to keep the fiscal deficit in check.
Outlook:
We continue to believe that while there are near term challenges for the markets, the long term growth story is intact. While economic fundamentals are improving, supply of paper likely to limit upside in the markets. Further with valuations at 15.5x, 15% above trend mean is also another factor retarding the up move. A change in global risk appetite is likely to cause an inflection in the markets on the either side thus, break the range bound movement.
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