• Home
• |
• Careers
• |
• Sitemap
• |
• Contact us
• |
• Kotak group site

Home > Knowledge Centre > India Markets - An Overview

Indian Markets - An Overview

View Archive

February 2010

Judging from month-end performances of various equity indices in India for February, one may be tempted to conclude that markets were very stable. After all, a large cap index like Nifty was up barely by about 1% and its Midcap peer, CNX Midcap was down by about 0.3% in USD terms. Similarly, currency markets ended the month gaining marginally. However, the intra-month volatility in all the asset classes paints a very different picture.

Prices rebased to 100 on 29th Jan 2010.

Data in USD terms as of 26th Feb 2010.

Source: Bloomberg

February witnessed significant events being played out – from Greek crisis and related currency volatilities to local events like Economic Survey, 13th Finance Committee, Railway Budget and Union Budget. The Greek crisis as well as concerns on the government borrowing program in FY2011 spooked the markets in the first half (at one time, markets were down more than 4% intra-month), with the market stabilizing towards the latter half as various finance ministry officials assuaged market fears with repeated statements on the government’s intent to rein in fiscal deficit.

Union Budget highlights

• Fiscal Deficit targeted at 5.5% for FY11 compared to 6.9% in FY10 and 6% in FY09, with the government also signaling continued intent on reining in fiscal deficit by targeting 4.8% in FY12 and 4.1% in FY13.
• Net borrowing of Rs 3.45tn to be lower than Rs 3.98tn in FY10. This was one of most significant worry-points for market participants on fears of crowding out; while this lower net borrowing is contingent on equity divestments in state owned enterprises as well as sale of 3G spectrum.
• Thrust on infrastructure accelerates with greater outlay of planned expenditure allocated to various infrastructure projects.
• Continued focus on consumption with greater tax breaks on income tax allaying fears of slowdown in growth rates as fiscal stimuli will be wound down gradually.
• Corporate India will see increased incidence of tax rates, excise duties which were reduced in the wake of global slowdown which have also been reversed.

Economy Survey & 13th Finance Committee Highlights

Apart from the Union Budget presented on 26 February, the other key policy release was the Economic Survey and 13th Finance Committee report (TFC). The key highlights are:

• The Economic Survey indicates that the economy should return to the 8%+ growth trajectory in FY11, and then march towards the double-digit zone in the next three to four years. For the current fiscal (FY10), the Survey pegs a growth of 7.2%, with industry and services expected to grow at 8.2% and 8.7% respectively. The production levels of the farm and allied sectors, however, are expected to slide 0.2% in FY09-FY10.
• The Survey mentioned concerns on persistency of elevated inflation as well as concerns on possibility of a worsening global economic environment, stifling any early signs of the recent export recovery.
• The government has accepted most of the recommendations of TFC, which include setting up a roadmap for fiscal consolidation over the next five years. For the Centre, revenue deficit should be eliminated and fiscal deficit should be brought down to 3% of GDP by FY14. A similar roadmap is proposed for the states. Combined debt target of 68% GDP (currently at ~80%) to be met by FY15.
• The implementation of the TFC recommendations as well as rollout of Goods and Services Tax will, in our view be a significant enabler to fiscal consolidation and augur well for the long-term finances of the country.

IIP Growth highest since 1995

Indian manufacturing continued its strong showing with the IIP index registering its highest growth since 1995. IIP YoY growth for December 2009 was 16.8%, well above market consensus estimates of 12.3% on account of the phenomenal 46% growth in durables and 39% in capital goods, denoting a revival in investment demand. Inventory build-up by companies was also a reason for high IIP growth.

Source: B&K Securities

Inflation Continues to be remain elevated

India’s WPI inflation for the month January 2010 stood at 8.56% YoY, higher from 7.31% a month before and 4.95% a year ago. We believe the major contributor to the high inflation rates is the price increase in food items and the cost of manufacturing processed food items like sugar.

Source: B&K Securities

Equity markets to continue to remain consolidated in the near-term

At 15X FY2011E and 12.6X FY2012E earnings, the Indian markets are attractively priced. While the markets have bounced back with worries reducing on the fiscal deficit front, we still believe that the markets will tend to consolidate. We expect this to happen in the first half  and continue as the macro concerns on inflation and monetary tightening reduce; the markets are also likely to starts focusing on earnings growth and FY2012E valuations in the second half of 2010.  Several factors may result in the market being range-bound in 1HCY10:

1. A likely 50 bps increase in policy rates in the RBI’s April 2010 credit policy,
2. further monetary tightening,
3. Lingering concerns about the strength of global economic recovery.
4. Impact on liquidity due to large offerings by Government of India, on meeting its disinvestment target.

While we expect near-term markets to be range-bound, we believe this provides an avenue for medium-term to long-term investors to increase their allocations to India, as long-term growth prospects improve with better government financials and corporate India capitalizing on the various growth opportunities that this strong economic growth will throw.

Contact Us