Weekly Market Update 22 Jul to 26 Jul 2013

If last week was the Govt.’s week with its big impact announcements on FDI, this week the RBI ruled the roost with more steps to tighten liquidity and reduce gold imports. As expected, the markets which saw some upside during the early part of the week, turned negative after the announcements from RBI with the banking stocks leading the race down south. This and more highlights in this week’s update :

• RBI toughens gold import norms. Wants 20% of gold imported to be exclusively set aside for exports.
• RBI increases daily minimum average holding of CRR to 99% for banks.
• RBI cuts its lending to banks under LAF to 0.5% of bank deposits.
• Rupee shows signs of recovery but still no noticeable effect.

In a bid to further curtail import of gold and reduce the Current Account Deficit (CAD) plaguing the economy, the RBI has mandated that 20% of every lot of gold imported should be exported. It has asked nominated banks to ensure that 20% of every lot of gold is exclusively kept aside for exports. Gold imports are seen as accounting to more than half of CAD and hence the Govt. and RBI alike have been taking steps to curb the import of gold and increase exports.

The sliding rupee is another of the problems that the policy makers are trying to control desperately. This week the RBI increased the daily minimum average holding of CRR to 99% for banks and cut the LAF to 0.5% of bank deposits in a bid to squeeze liquidity from the market and stop further depreciation of rupee.

The steps taken by the RBI had a negative effect on the market as this was seen as heralding a higher interest rate regime and days of tighter monetary policy. The banking stocks were pressured the most registering a 509pt fall in a single day. The remaining days of the week too saw negativity in the market. Good earnings reported by individual companies too did not help much to revive sentiment.

The RBI’s monetary policy review is due next week and markets will be under some pressure in anticipation of the monetary policy. Though there is widespread agreement that there will be no change in key rates just like last time, some circles have the opinion that in a bid to further reduce liquidity, RBI may in-fact increase some key rates which will be bad news for markets. Even if there is no change in key rates, the markets will see some disappointment as there will be no growth stimulus. Chances are that the week ahead will be more red than green. At best the markets will be muted with no big rallies of falls.