2. Equity View:
The markets continued to be range bound last week in the absence of a positive trigger. The Presidential elections
are over and the markets have a lot of expectations about what reform measures the Government of India might
take. We saw the first action on that front with the import duty on power equipment which has been expected for a
long time. (Government of India had on 19 July approved an overall levy of 21% duty on import of power generation
equipment). This clearly is beneficial for companies like BHEL and L&T, although it would take a couple of years
before we see a significant impact in the earnings of these companies. However from a sentiment point of view, it is
definitely a positive step.
Further action which is expected by the government in the next couple of weeks is a hike in diesel prices. The diesel
price hike remains the most critical set of reform expectation that the market has from the government. Incase
diesel price hike does come in; it will definitely lead to some kind of positive sentiment in the buildup of the quarterly
results.
In terms of economic news, data released showed that the monsoons continued to remain weak. Till last week, we
had almost a 22% deficiency as far as the Pan-India monsoon numbers are concerned. The biggest scarcity of rainfall
has been in the Northwestern region between the agricultural belt of Punjab, Haryana and Western Uttar Pradesh
which remains a cause of concern. The rainfall though has been decent in Eastern as well as Northeastern areas
where the rice cultivation would receive a boost from good rainfall.
We also had inflation data being released for the month of June. The WPI inflation numbers came out as 7.25% as
against an expectation of 7.5%. The positive thing here is that Core inflation continues to remain around 5% - which
st
is within RBI’s comfort band. We have the RBI Policy on 31 of July and the markets are expecting a rate cut this
st
time. Our own expectation is that there will be a rate cut of 25 bps on both repo and CRR on the 31 of July.
In terms of company results we had Reliance Industries Ltd. Registering a 21% y-o-y fall in profits essentially on the
back of decreasing output from KG-D6 basin. The gas output from this field has been falling continuously because of
natural decline and complexity of reservoirs and it is expected that output will stay weak at least for the next 12
months. Also the petchem margins and the refining margins remain weak. However the sales numbers increased by
13.5% on the back of increasing volumes. We believe that at the current price, shares of Reliance Industries are
adequately valued. We don’t see any major downside triggers from these levels. Also, we would not see any upside
till the launch of broadband telecom services from Reliance which is expected by the end of this calendar year.
In the global markets we saw the Spanish yields spiking up significantly on Friday and Monday. This was on back of
one of the eastern regions of Spain seeking a bailout package from the central government. (The eastern region of
Valencia had revealed on Friday it would need a bailout from the central Madrid government. Over the weekend, the
southern region of Murcia said it may also need help.) This again reinforces the concerns about the weak
macroeconomic scenario not just central economies of PIIGS (Portugal, Italy, Ireland, Greece and Spain) countries but
also in their state level economies. This particular case again highlights that significant amount of effort which needs
to be required as far as coming up with a proper bailout package for the region is concerned.
3. News:
DOMESTIC MACRO:
India's wholesale price index (WPI) rose a lower-than-expected 7.25 percent in June from a year earlier, mainly
driven by higher food prices.
The Reserve Bank of India (RBI) has increased the priority sector lending target for foreign banks with 20 branches
or more to 40 percent from 32 percent in a phased manner over a maximum period of five years starting April 1,
2013.
Individual residents who receive foreign currency will not be required to convert the funds into rupees, while
exporters and corporates are mandated to do so, the Reserve Bank of India (RBI) said. The RBI had in May directed
exporters to convert 50 percent of their earnings in the Exchange Earners Foreign Currency (EEFC) accounts, to
protect the rupee from weakening sharply.
The IMF shaved its 2013 forecast for global growth to 3.9 percent from the 4.1 percent it projected in April,
trimming projections for most advanced and emerging economies. It left its 2012 forecast unchanged at 3.5
percent.
GLOBAL MACRO
Euro:
Euro zone finance ministers approved an agreement on Friday to lend up to 100 billion euros to Spain so it can
recapitalise its banks, but the exact size of the loan will probably only be determined in September.
The European Central Bank turned up the heat on Greece on Friday ahead of a review of its bailout programme,
saying it would stop accepting Greek bonds and other collateral used by Greek banks to tap ECB funding, at least
until after the review.
US:
Growth in U.S. factory output slowed to a 1.4 percent annual rate in the second quarter after a brisk 9.8 percent
pace in the first three months of the year.
The Labor Department said initial claims for state unemployment benefits rebounded by 34,000 to a seasonally
adjusted 386,000 last week.
Federal Reserve Chairman Ben Bernanke defended the U.S. central bank on Tuesday from accusations it did not
move aggressively enough to address problems with the setting of the global lending benchmark rate Libor, saying it
was in the hands of a private banking group.
China:
Chinese President Hu Jintao on Thursday offered $20 billion in loans to African countries over the next three years,
boosting a relationship that has been criticised by the West and given Beijing growing access to the resource-rich
continent.
4. Satadru Mitra Varun Goel Jharna Agarwal
Abbas Naheed Kinjal Mehta
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