Recent Softening in Crude Oil Prices Along With Easing Core Inflation has Strengthened the Case for Further Monetary Easing<
11-Jun-12   11:34 Hrs IST

Mr. Sivasubramanian KN
1) Indian equities have bounced back sharply during the week ended 8th June 2012, what are the encouraging signs for the future?

Hopes of monetary easing, positive global sentiment and initial signs of policy action helped Indian equities post a sharp rally the week and outperform global/Asian peers. The sharp bounce back in Indian equities was not surprising, given that the markets had been impacted by a slew of developments both in India and overseas and most of the negative news seem to have been priced in. Some of the encouraging signs for the future are -

Economy: The latest GDP report pointed towards a further slowdown, recent leading indicators data such as the PMIs indicate India's manufacturing sector has kept up its modest pace of expansion and activity in services sector is accelerating. While India and the global economy may continue to face various challenges over the near term, we believe that we are close to the bottom of this economic cycle in India and we should probably see some improvement going ahead. The recent softening in crude oil prices along with easing core inflation has also strengthened the case for further monetary easing.

Policy: PM unveiled plans to provide fillip to investment activity and pushed for faster progress on awarding infrastructure projects. The plan envisages awarding contracts for two ports, three airports and certain segment of the dedicated freight corridor, as well as addition of ~18,000MW power-generation capacity in FY13. The government will also finalize plans to expand / modernize existing airports, ports and rail network. The coal supply target for power sector was also raised to 11% from the prevailing 8.8%. The above measures if executed as per plan should spur economic activity. Similar policy initiatives and accelerated reforms are essential to boost and change the perception about policy making.

Rupee / Foreign flows: The rupee's sharp decline is not isolated; many EM currencies (ex. Poland, Turnkey, etc) have witnessed relatively higher falls in 2012YTD due to global risk aversion. The steep fall in global crude oil prices as well as the drop in gold imports offers glimmer for hope on the current account balance front. In addition, RBI and the government have announced various measures to attract flows from NRIs and overseas investors.

Also it is important to note that despite various taxation policy concerns, FII portfolio flows into equity have not been substantially negative in April/May ($628 mln). FII flows for 2012YTD (as of end May) were +$8.49 bln. In addition, there have been inflows to the tune of $4.3 bln in debt markets.

Earnings: The recent corporate results indicate companies with sustainable business models remain on a firm footing and are coping well with macro-economic challenges, and the earnings downgrade cycle seems to have stabilized. It may be recalled that Corporate India maintained its RoE edge over Asian and global counterparts even through the 2008 crisis.

Global Scenario: The situation in Europe could lead to substantial policy response by policy makers that might boost sentiment. This along with the fall in global commodity prices should help countries like India dependent on energy imports. However, if the situation deteriorates, the increased risk averseness can weigh on portfolio inflows into emerging markets like India.

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