The week ahead – 26/02/2007 to 2/03/2007

For years, in India, people try to predict budget. Various lobbies express their wishes for the budget and common people keep waiting – just to know the commodities whose price will be affected by the budget, every year. It is one of the very few economic events that draw attention of common population through out the India. For last one or two years our Finance Minister is trying to make the budget a non-event. So many people expect budget this year will be mere collection of policy changes and some basic structured allocation of fiscal expenditures, major decisions regarding tax structure will be taken latter. I have no quality to or intention to decode what’s going on in FM’s brain. But this week budget will remain market driver. In the first half market will remain preoccupied with the thought of what’s coming and last two days will be spent in analysis.

Last week market was volatile of considerable degree and often kept me wondering, in a nutshell quite perplexed. Nifty50 got downsized by couple of hundreds points. People have many explanations for such fall but definitely market valuation got better especially after December quarter result. Corporate India’s future is still looking bright. Only spoilsport can be inflation. But as primary goods, vegetables and edible oils mainly induced this inflation, it seems cyclical. And sooner the harvest time comes price will get back to their own level. So from here, inflation is looking more like a short-term threat.

Stock market player are also concerned regarding STT. They are expecting another rate hike in this budget also. So by simple rule of market we can say this news of hike has got discounted; what remains is the concern regarding the degree of hike.

To sum up, we can expect budget rally to start from Tuesday with some buying simply because of better valuation. Situation is not much alarming, so we should not expect any horrific announcement from FM. Following FM, if he wants to make budget a non-event he has to make it more inline. And if thing goes inline market have to react positively. No specific level for this week.

Issue – inflation and near future

Here I would like to discuss some general issues regarding inflation. The latest detailed report, available from RBI, says inflation is at 6.73%. This is the highest since 2001-02. Crucial contributors are primary products at 12.3%, fruits and vegetable at 19.1%, edible oils at 14.7, cement at 15.8% and iron steel at 15.4%. The most important issue regarding the current rise in wholesale price index (WPI) is the contributors behind such rise. Agricultural items, especially the primary items contributed the most followed by manufactured items like edible oil, cement and Ferro-metal. Generally it’s considered that farm products’ prices are season in nature. As the harvest comes closer prices go down unless some serious casualty is found in production. Price of agricultural product goes up in far months when economy depends on the food stocks. Currently, there are issues regarding hampered farm output because of some weather mishaps. Especially the onion, pulses, grains are affected most. But in agriculture, weather related casualty measurement is difficult. So nobody can confirm actual future shortage of production, which we are going to suffer, only speculations are whirling around. Number of consumer in short term is fixed and consumption is not going to rise in multiple folds. As soon as the production starts coming and supply situation gets clear we can expect less volatility since agricultural product led inflations are mainly supply side problem.

On the other side, price rise of cement and Ferro metal are mainly due to increased demand for winter related construction boom. Here supply is not going increase much in short term. To stabilize the price demand needs go down at lease to some extent. As summer season is going to spread over the country in few weeks we can expect some down in construction demand, simultaneously lesser demand for the construction inputs. So, by the rule of nature (!!) we can expect some relief in inflation situation by end of March or first of April.

Moreover Indian politics is highly inflation sensitive. With more than one state level election on the card Central Government is quite aggressive to stable the commodity price. So we can expect inflation to slow down very soon.

As the farm price volatility is a regular annual event and issue agricultural productivity has become serious we can expect some policy measure and planned expenditure on this part in forthcoming union budget, which is due on 28th February’2007.

www.eaindustry.nic.in

“Right way to introduce fuel economy standards” – some issues

Here I will discuss some issues related to an article “Right way to introduce fuel economy standards” published in THE HINDU BUSINESS LINE dated 23rd February’2007, authored by Mr. Chirag Shah. The write up was a good peace of reading and informative. Major objective of the article is to argue in favor and against the rolling out of an Indian fuel economy standard. Author in right manner reasoned why such a standard should be introduced and should not be left for invisible hand of market. Technically, fuel economy or more commonly mileage depends on many issues like, vehicle weight, displacement capacity of engine (you can figure this out as some number written in “c.c.” like, 100 cc, 1000cc etc.), auxiliary energy uses in the vehicle (this factor works for less economy in luxury class vehicles), transmission system, and driving style and road condition.
Author considered only vehicle weight and engine size prominently for his discussion. But others, specially driving style and road condition factors cannot be ruled out. Firstly, various luxurious facilities in high-end sedans require energy and car engine is the only source of energy in a moving car. So, more automobile gadgetry will drive down fuel economy and we cannot restrict their uses. Secondly, driving style is a very serious factor. In India getting a driving license is pretty easier job thanks to over accommodative automobile licensing officers (I think you know what I mean to say!!!!). Not only private vehicle owners but this is true also for public bus drivers, auto rickshaw drivers and other commercial vehicle drivers. Not resting engine while in red signal, over throttling are few notions of bad driving style. And that burns fuel uselessly. Thirdly, one of the most important issues is road quality and traffic condition. These two factors combinedly hampers fuel efficiency severely, especially in metros, tier 1 and tier 2 cities.

Setting a fuel economy standard will be easier job; automobile manufacturers will also comply with the norms but realization of the efficiency won’t be easy under ground reality. Until the above mention last two issues are addressed properly any norm will hardly be effective.

for more details please go through the article published in The Hindu Businessline
www.thehindubusinessline.com

The Week Ahead 19/02/2007 to 23/02/2007

Last week market had moved more like a roller coaster. In the first half, market made some negative move as it was expected. Strong rupee, deteriorating inflation numbers and upcoming budget made the way for closing of some positions. FII sold in major way, though buy positions were not bad even; so it seemed like sort of position churning. Last Thursday again economy saw another worse inflationary number. Other than sugar, majority of food grains, species and food items are seeing price appreciation.
RBI has raised CRR from 5.5 to 6%, which will be complete by 3rd March – counters strike from monitory front. Government on the other side has cut the petrol and diesel price – an effort to check inflation from fiscal side. But as supply concern is aggravating the situation, petroleum price won’t solve the problem to any extent. It will only address the transportation related cost and that much price can be controlled by such move. Unless major step is taken to address the supply concern or some sudden improvement emerges in crop expectation, it will be difficult to manage upward price movement.
This week, market is expected to remain steady, not much volatility is on the card. Some pending roll over trade is going to take place and majority over rolled over positions are buy position. Over all market players are bullish over union budget. And all of them are expecting any further move after budget only. Market, this will remain ranged with upside resistance at 4220 and 4250. First half of this week can be expected to remain strong and steady with some retracing move near or after expiry.

The week ahead 12/02/2007 – 15/02/2007

Major incident for the week was another disturbing inflation figure in line with the current increasing trend. Latest figure is recorded at 6.58%, which is at two years’ high. This data is coming at a time when some of the major food prices are coming down considerably, like sugar and some major grains. Such move would lower the real return from any asset.
Money market for the week was pretty steady. In the first half of the week it shown intra day move above 8% but other wise settled near 7% which was quite close to short term borrowing cost.
On the forex front rupee is getting stronger and RBI is accommodating the move. It can help to counter inflation to some extent. Rupee dollar exchange rate has come down to 44.1050.
Last week the market was pretty straight with ranged move in 2nd half. It closed with a negative tone on Friday, which was quite expected facing deteriorating inflationary scenario upcoming budget session. The second event, i.e., budget will again effect this week’s market. Monday stock market is expected to remain down and that tone may continue in the first half. Decisive support will be at 4083; closing below 4080 may induce some further down trend. But armed with good overall December quarter corporate result and favorable current index PE we cannot expect any crash at this moment. Market will remain dull with some end-February surprises. Final course will be decided only after budget.
FII transaction figure remained positive for the week and with strong rupee against USD foreign fund would like to book some profit, although this may not be true for hedged positions.

Inflation: monitory tightening and fiscal attempts

Inflation is getting bigger and bigger as concern for Indian economy. Research institutes are raising the growth expectations but the overall bright future is clouded with the single concern regarding increasing prices. Latest figure of 6.58% is at record high level in recent past.

Anybody knows that inflation is some sort of hazard that growth delivers. In a sense one can think that rising price level will accommodate the producers and truly it does. But on the other hand it hampers the consumption spree that lead the growth, thus cutting the major lifeline to the producers’ prosperity. Nominal wage definitely increases but with a time lag and that lag make the difference lowering the nominal value of money. Result is simple – the entire rose bed becomes thorny. Things get more sever when economy is running at or near full capacity, when stretching the supply up is near impossible.

Any attempt to tackle inflation has to have two channels, monitory and fiscal. In case of India major attempts taken are mainly monitory. RBI is ready with its arsenal to adjust the supply imbalance in short run. Major thrust for any monitory policy is at restricting the demand. But even under tightening monitory policy, high growth in domestic market may often induce the producer and consumer to overlook the initial tightening attempts. Again often with an expectation of further future restrictions, consumer and producer try to balance their expenditure in favor of current periods. As result, things move further out of control. So monitory policy as quick response to inflation may not work as it is intended to do.

In such case what comes handy is fiscal attempt. And major focus it carries is to clear the supply bottleneck. Fiscal-strikes try to accommodate production structure and raise the supply, which has prominent power to nail the price down. One can argue, capacity increase is no short-term incident, so fiscal measures cannot be a quick heal. But often tax regime and tariff structure creates restriction in supply chain; if such hindrance are cleared then even without any organic change in domestic capacity one can improve supply flow to some extent. Such attempt can provide some relief and time, which again allow working on long-term policy options, because it’s the time that is precious in such cases.

Credit growth is increasing at a pace more then the targeted rate even under tight monitory policy, real estate boom is still intact with more and more estate development projects are coming in. When Central bank is trying to check personal loan intake by increasing banking provisional requirements, trend is looking hardly scratched. Now government should think of balancing monitory policies with fiscal measures. That can positively keep the growth flavor intact and inflation at manageable level at least for some more days.

The week ahead – 5/02/2007 to 9/02/2007

Last week was quite eventful and volatile. Credit policy for the third quarter was published on 31st January and last data released on inflation showed continuation of high inflationary trend, it was recoded at 6.11% far above the target of 5.5%, RBI set for the economy. Stringent provisioning rule for loan exposure to capital market would make positional trading expensive in equity market. 7.5% of REPO Rate will make short-term money expensive, which will again make short-term speculative initiative costly. These will definite act on the volume and volatility in the market.

For last two days open interest for nifty-index futures were down, f&o turnover is still lower than average for the last month. Cash segment turnover is pretty good compared to derivative counterpart. With 17 more trading days left for 2007 union budget, some correction can be expected in coming days, as traders would like to lightweight their position ahead of budget. But in the week ahead such correction is unlikely at least in the first half of the week.

Current PE for CNX Nifty50 is at 20.12; historical PE resistance for Nifty 50 is found to be around 21.8. If we consider current earning and PE resistance than fair value of Nifty can be around 4500. We can expect couple of hundred more of Nifty 50, but not likely before budget.

For the week ahead nifty is expected to get support around 4083 and on the upper side resistance can be around 4250-80. Without any other improvements, the market is expected to remain ranged with some positive turns in the first few days.

Short selling – ban is going to be lifted

Short selling with respect to equity market means selling any scrip, which will fall short if seller is asked to give delivery. SEBI banned short selling in March’2001 following excessive volatility domestic equity market was going through that time for institutional traders though retail traders were kept out of the regulatory clutch. Regulator is coming out with a new framework under which institutional short selling will be allowed again.

This style of trading is quite popular among market participants through out the world but regulators think different. As traders are allowed to sell without holding the scrip it often create stir in the market. Supporters argue that short selling justify the market valuation. With regulatory ban on short selling, market may get inflated excessively following any wide spread buying spree.

But regulators’ views are something different. As investors are psychological very vulnerable to price decline, unrestricted short selling can create price volatility and whole system can lead to a vicious circle.

Evil or angle whatever it may be, when market goes beyond its valuation often time we market participants feel a need for some sort of checkers and in current situation when Indian equity market is in the middle of a full fledged bull run, institutional short selling within a regulatory framework can add depth and width to the market.

www.en.wikipedia.org

www.investopedia.com

www.sebi.gov.in

Raging inflation: a serious threat in the middle of a sweet dream

Undoubtedly the most annoying problem for Indian economy at this juncture is ever rising prices of goods and services. Economists term such incident as inflation. Price of any marketable moves depending on supply-demand situation-it may rise and fall as well. But when price keeps on increasing over periods it becomes inflation.

Reason behind inflation is very structural, seasonal fluctuation can create sudden surge in price but that do not effect inflationary in much way. It’s the basic or structural changes in supply and demand scenario that change inflationary outlook. Inflation is more like a baggage an economy has to carry if it’s willing to grow. It gives impetus to the manufacturers to produce more. But it also impregnates impedance to growth. Higher inflation worsen real value of money and that again adversely affect demand. So an economy has to keep on managing this issue to have a safe and easy growth ride.

In the middle of a long Bull Run, Indian economy is suffering from similar growth related inflationary problem. Physical production capacity for many commodities are at resistance level and gestation period for most of the commodities is considerably long. So, outward shift of short-term aggregate supply curve is difficult, while demand is robust. Increasing salary slip, rise in middle class and “increasing asset price” related wealth effects are inducing domestic urge for consumption. Ambience is heating up and RBI’s target of 5.5% for inflation is looking quite unachievable. Throughout the January, inflation stayed above 6% mark with exception of 5.95% for week ended on 13th January. If we consider the production outlook for kharif and ravi crop, then situation aggravates further since both of south-west and north-east monsoon were uneven across the region. Only breather can be higher acreage under ravi crop.

As usual RBI is active with all its effects to save economy from a bumpy ride. It’s nurturing all means to strike back over raging inflation and majority of them are meant for cutting the demand down in short term. Basic target set for central bank is to make short-term money expensive, so that, speculative hoarding stops. But this can potentially make working capital financing expensive for companies, which may restrict them from continuing their stunning performance. Again ahead of harvest season, building up non-speculative stock for traders will be costlier. That can interrupt agricultural supply.

So as a whole job is pretty delicate and 25 basis point hike in repo rate may not be effective enough for present situation. If scenario does not change dramatically in coming days, we are going to swallow some bitter pill and hardly there is any way out.

www.rbi.org.in

www.finmin.nic.in

http://indianeconomy.org/