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Home > Knowledge Centre > India Markets - An Overview

Indian Markets - An Overview

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April 2010

The Indian market maintained a general positive undertone during the month of April. While most global equity markets have been struggling on the back of continued worries on some of the European economies, a good beginning to the result season and indications of stronger than expected inflows for the government. Auction of 3G spectrum, and in-line moves by the central bank on monetary policy helped sentiments. Though overall gains for the Nifty in local currency terms was a modest 0.55% (and 1.89% in USD terms), the strength of the market was however unmistakable when one observes the broader indices such as the BSE200 (up 2.75% in USD terms) and the CNX Midcap Index which returned a huge 6% in USD terms.  During the month, Financials services, real estate, utilities and IT services outperformed while Telecom, healthcare, automobiles, and energy underperformed.

FII continued to buy Indian equities adding $2.1 bn in April taking the YTD net buying to $6.6 bn. Domestic Institutional investors were net buyers of $488 mn worth of equities during the month taking the YTD net buying to $2.3 bn (source SEBI, JP Morgan). Buoyed by strong flows, the Indian rupee appreciated by 1.3% over the month.

Earnings season

The last quarter earnings season has begun on good note with better than expected numbers in banking, IT services and Automobile sector. The banking sector, especially the private sector banking space, delivered very strong numbers for the quarter on the back of improving asset quality and a pick up in the credit cycle. IT services companies delivered strong numbers, and on a back of global revival in technology spending have given strong revenue growth guidance, though the business margins would get impacted by rupee appreciation. While there have been a few disappointments particularly in capital good segment, the results have been slightly better than expectations.

Monsoon worries

Last year, monsoon failure apart from dragging down the overall GDP growth rates had a significant impact on inflation. As per all forecasts, monsoon seems to be on track this year. In fact recent forecasts suggest a better than average rainfall this year mitigating one of the major worries for investors.

Inflation and Credit policy

Inflation for the month of March stayed below the double digit mark. Food prices have been falling on increased supply and better than expected winter crop. Moreover, a commodity sell off led by the European crisis will mitigate inflation worries. Though we believe that inflation has peaked out, inflation will remain a worry for the policy makers. In it continued efforts to rein in inflation, the central bank on expected lines raised policy rates by 25 bps and the cash reserve ratio by 25 bps. We believe that the central bank would further tighten rates by up to 50 bps in the next policy review.

Monetary policy still very accommodative in relation to pre-crisis history RBI's repo, reverse repo rates and cash reserve ratio on LHS, SLR on RHS (%)

Source: RBI and Kotak Institutional Equities

Thus, RBI’s FY2011E monetary projections (as below), in our view, appear reasonable and supportive of overall growth -

• Real GDP growth at “8% with an upside bias”
• Inflation rate at 5.5% (end-year)
• M3 growth at 17% yoy, deposit growth at 18% yoy and credit growth at 20% yoy.

Government of India is in the midst of its largest ever fund raising through the auctioning of the 3G telecom license. This is also important from of bringing down the fiscal deficit and thus the interest rates. While the budgeted target was Rs.350 bn, the government is on track to raise significantly higher amount of above Rs.450 bn. It also recently partially divested a state owned utility raising around $250 mn. It seems that the government is on track to meet its fund raising requirement for the year as a whole. We also believe, that the government may go in for some reforms on long overdue fuel pricing, particularly on petrol prices. This will lead to a lower subsidy burden.

As we have been saying in our past few communications, we expect the markets, though volatile intra month, to remain range bound in the first half of the calendar year. While the global situation remains uncertain and will keep the markets on tenterhooks, macro factors in India are improving and growth remains intact. Falling inflation, normal monsoon, reduced fiscal worries and thus lower interest rates, robust GDP growth and thus strong earnings growth, all indicate to markets picking up in second half of the calendar year. We continue to believe that midcaps are likely to outperform the broader markets after this consolidation phase. We believe that contagion is the new buzz word in the global financial markets and as such a European crisis led correction would provide a good entry point in the Indian markets.

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