At
a time when the news tape was unequivocally shouting for a precarious macro
situation of India and the bleak earning profile of India Inc, market rebounded
in style and is almost back to square one. Is it a sharp dead-cat bounce or a
serious resumption of uptrend from an extremely benign valuation zone is a real
issue to debate upon. The solid come-back for the market coincides with the day
of Infosys result delivering a surprisingly weaker numbers and its guidance
remaining much below the Nasscom projections. The lead for the market has come
from the banking sector at a time when all sorts of negative stories from
cobra-post to rising NPA etc., etc, were ruling the roost and the negative
headlines on it was virtually all around. It has always been the strange habit
of the market to behave in an awkward contrasting fashion away from consensus.
Since then the banking sector has rallied hard with virtually all the stocks
gaining considerable ground. The trigger point was the massive decline in gold
and crude oil inadvertently. It was almost clear case of market performance
since the fall in the market for this calendar year was primarily on concerns
of unsustainable current account deficit and its funding concerns. Now with the
sharp fall in gold and crude, it clearly reflects the fact that import bill for
crude and gold would come down sharply for this year if the declining trend in
these two item continues. 
Otherwise, we, for the past couple of years are
running our current account deficit at an elevated run-rate of USD80-90 billion
which is being financed by capital flows. The merchandise trade deficit is
financed by ITES and remittances to the extent of 65% in 2012-13 which was even
higher in 2006 to 2011 to the extent of 85% of merchandise trade deficit. The
net oil import bill is at USD110 billion and the bullion import stands at USD45
billion for 2012-13. This has been the primary reason and the central area of
concern for the RBI and for India’s macro stability and RBI in the past came up
with measures to curb the demand for both. Government also took measures by
increasing import duty on gold from 4% to 6% and curtailing subsidy by flexible
pricing in petro-products. Though the measures could not have any meaningful
impact in the immediate term but the decline in bullion and crude have had
serious positive impact on the import bill if the trend persists downward. A
10% decline in gold and oil import could alter the import bill by almost
USD15billlion though in percentage terms the CAD shrinkage may not look
significant but the trend ofcourse on a YoY basis will be seen heading lower.
More dynamic changes to CAD to come with exports getting a boost and this were
to happen if the global economy recovers smartly and thereby pushing up demand
for Indian products and services. The conventional approach for an enlarged CAD
would be to allow the currency to adjust downwards. This may lower imports and
increase the demand for exports. But contrary to it, the impact of declining
gold may have propelled buyers to come up with their pent up demand and for
oil, pass-through in more than 50% of the products for consumption is minimal
and hence the compressed prices will have limited impact. Moreover, on the
export side majority of it is exported as part of supply chain and hence in
such a situation, large depreciation does not escape notice and is very often
neutralized by price negotiations. As a result of all these despite of 20%
depreciation in INR, exports did not get a boost yet.
For
this year, the earnings outlooks in the canvas of Nifty stocks have been
painted gloomy. Even for a 15% earning growth in Nifty stocks, 70% incremental
growth in Nifty earning to come from Financials, Materials and Autos. This
clearly reflects upon the fact that a series of interest rate cut by RBI this
year have the potential to boost earnings for the market sensitive sectors
& companies which in turn would support markets. At present the interest
rate still remains elevated and hence the earning picture doesn’t look healthy.
During the course of this year the consensus earning picture which is projected
bleak may change with altering macro outlook. Our sense is that lower interest
rates would be a major catalyst for changing earning outlook.
As
was mentioned in our December 2012 Monthly Insight stating for 2013 to be a
year of declining commodity prices and lower interest rates, until now
commodities have shown all signs of cooling-off including precious metals,
crude oil etc. Recently inflation print and the core inflation continue to head
lower is giving a comforting sign and will provide headroom for RBI to cut
interest rates comfortably. The RBI lowered the repo rate by 25 basis points on
3rd May’13 for the third time this year in a bid to help revive
growth in the economy. Although, the cut in policy rates by the RBI is not
really translating into a similar cut in lending rates of banks. The clamour
for the Reserve Bank of India to cut interest rates at its policy review meet
on May 3 has been met with a 25bps cut in repo rate at a time when inflation is
at its twenty month low at 5.96 percent and commodity & oil prices
correcting sharply along with gold.
