Sunday, 21 July 2013

Weekly Market Update 15 Jul to 19 Jul 2013

The week started with RBI taking some tough steps to curb the rupee fall. The RBI actions led to some downfall in the markets and the Bank Nifty remained under pressure for most of the week. The bad news for banks continued with RBI fining 22 banks for violations in KYC norms. There was some positive news with the govt. revising FDI norms in various sectors.
The highlights of the week are as follows :

  • RBI raises Marginal Standing Facility to 10.25% in a bid to increase the cost of borrowing by banks and reduce liquidity.
  • Govt. allows 100% FDI in telecom.
  • RBI fines 22 banks for violations in KYC norms.

In a bid to curb the downfall of the rupee the RBI increased the Marginal Standing Facility to 10.25% from 8.25% and capped the borrowing at 1% of total deposit of bank. Though it is touted as a short-term measure, such a drastic step to squeeze out liquidity from the economy did not go well with the analysts and experts. Speculation started that this might be the beginning of tighter monetary policy by the RBI. The sudden steps taken by the RBI put pressure on banking stocks and saw some negativity on the market as a whole. Debt and money market MFs were under pressure due to redemption requests which spiked due to the RBI action. Hence, RBI was forced to provide a Rs.25000cr liquidity to MFs to tackle the redemption requests.

Exactly what measures by the RBI achieved is still debatable as the rupee still hovers in the same region and there is no noticeable appreciation of the rupee which can be attributed to the RBI announcements. Experts believe that if these actions do not shore up the rupee then we may be seeing an increase in the CRR in the coming monetary policy reviews.

There was some positive note however due to the announcement by the Govt. of allowing 100% FDI in telecom. The minimum FDI limit in many other sectors has also been increased to 49% and for various sectors the mandatory FIPB approval has been lifted till 49% FDI. Telecom stocks predictably reacted to this with some positivity signalling that the developments are good for the industry in general.

The markets were able to wither the storm of RBI announcements, thanks to stellar performances put by the Q1 earnings of many companies like TCS, Axis Bank, RIL etc. The FDI announcements also helped to some extent.

How far this positivity will continue is a question mark. The fact that most of the upside is due to the effect of good results affecting individual stocks is something that has to be noted. As the RBI has taken some steps to curb the rupee fall, and with the Govt. and RBI worried about the economy in the earnest, it remains to be seen what future steps will be taken by the RBI and Govt. for the betterment of the economy and how the markets react to it. As the deputy chairman of the planning commission, Mr. Montek Singh Ahluwalia said, it seems we have to be prepared for some pain for the long-term gain.