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Home > Knowledge Centre > India Markets - An Overview

Indian Markets - An Overview

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March 2010

The Indian equity markets witnessed strong returns in March; led by positive global cues and huge foreign inflows. Specific to India, Standard & Poor’s (S&P) upgrade of India’s long term sovereign rating from Negative to Stable also boosted sentiment. Materials, Healthcare and Telecom sectors were relative out-performers, while IT services, Utilities and Industrials underperformed.

Nifty gained 9.38% in March outperforming most emerging markets, post the Union Budget presented on 26 February; foreign investors have pumped in significant inflows. In the month of March alone, FII inflows were to the tune of US$ 4.3bn whereas YTD net buying aggregated to US$ 4.5bn.

S&P raised the outlook on India’s long term sovereign credit rating to stable from negative. The ratings for the long-term sovereign (BBB-) and short-term (A-3) bonds was maintained. The revision in outlook was driven by an expectation of improved fiscal position and strong growth momentum over the next few years. The outlook was lowered to negative in February last year triggered by significant increase in the fiscal deficit. The revision in outlook was largely expected after the Finance Minister presented the federal government budget for fiscal year 2010-11, whereby the government targeted a Federal deficit of 5.5% of GDP and also agreed to follow the medium-term fiscal consolidation plan outlined by the Thirteenth Finance Commission.

While global news-flow and the rating upgrade attracted global liquidity, the Reserve Bank of India announced a surprise tightening of monetary policy, raising policy rates (repo and reverse repo) by 25 bps. With this, the repo and the reverse repo rate stand at 5.0% and 3.5% respectively, with immediate effect. The Cash Reserve Ratio (CRR) was left unchanged at 5.75%. In the January policy meeting, the RBI had begun the normalization cycle by raising CRR by 75bps. Directionally, a hike in the policy rates was on the cards after the February WPI inflation nearly touched 10%. However, repeated statements from the RBI that it would not take any action measures between policy reviews except under extraordinary circumstances lulled the market into expecting the rate hike in the April policy meeting. However, markets seem to have taken the unexpected timing in its stride and continued their strong performance for the month. We expect further tightening measures by RBI in its review due for mid April.

Monetary policy starts tightening

RBI's repo, reverse repo rates and cash reserve ratio on LHS, SLR on RHS (%)

Source: Reserve Bank of India, Kotak Institutional Equities

WPI inflation continued to exceed expectations, as the February print increased to its 16 month high of 9.89%. Sequentially, the overall index gained 0.9%m/m, sa from 0.5% in the prior month, reversing the trend of easing prices in December and January. Higher food and energy prices drove the monthly index higher. The December print was materially revised upto 8.1% from 7.31% estimated earlier. Inflation is however expected to peak off by June as food inflation has incrementally begun to moderate and positive impact of a high base of last year starts taking effect.

Headline WPI inflation rate (yoy), March fiscal year-ends, 2009-2011E (%)

Notes:Inflation is actual data till February, 2010 and Kotak Institutional Equities estimates thereafter.

Source: Government of India, Kotak Institutional Equities estimates

The 10-year treasury yield remained unchanged at 7.85% over the last month. The INR appreciated by 2.4% against the US$ over the month, led by strong inflows. India’s foreign currency reserve decreased marginally to US$ 254bn. CY YTD FX reserves are down by US$ 4.7bn.

India’s current account (CA) deficit widened to US$ 12.0bn (-3.4% of GDP) in 4Q09 from US$ 11.9bn in the previous quarter. While the current account deficit nearly remained stable, the surplus on the capital account declined on lower foreign investment. The overall balance thus moderated to US$ 1.8bn from US$ 9.4bn in 3Q09.

Rapid improvement in exports (+13%oya) against that in imports (+3%) helped limit the merchandise trade deficit to US$ 30.7bn (-8.8% of GDP) from US$ 31.9bn (-10.5%) in 3Q09. However, moderation in invisible receipts continued for the second consecutive quarter. Net invisible receipts eased to US$1 8.7bn (5.3% of GDP) from US$ 20.0bn (6.6%) in 3Q09. Receipts from software services improved (US$ 12.7bn) after declining in the previous two quarters; but lower private transfers (US$ 12.8bn) and investment income payouts (-US$ 2.0bn) lowered total receipts. Sharp moderation in foreign investment inflows and banking capital lowered the capital account surplus to US$ 14.7bn (4.2% of GDP) from US$ 22.6bn (7.5%) in the prior quarter. Increased risk aversion led by concerns on sovereign default lowered both direct and portfolio inflows. Net FDI inflows nearly halved to US$ 3.9bn from US$ 6.5bn in the previous quarter.

Industrial Production numbers continued to be robust, with the Index of Industrial Production (IIP) reporting a growth of 16.7% YoY. Strength in capital goods continued to drive the overall momentum, growing 13.1% MoM on the back of a 25% increase in December.

Source: Central Statistics Organization; seasonally adjusted data by J.P Morgan’s report dated 1st April, 2010

Outlook

With the strong rally in Indian equities over the last month, we believe that the Indian markets will consolidate as valuations appear rich and markets await the annual results from Corporate India starting April to June. While we expect the aggregate corporate results to be strong for this quarter, focus would increasingly move to the quality of earnings growth in the future, as most of the growth this quarter will come from the low base of last year. While we expect further tightening from RBI to check on inflation and believe it to be prudent for long-term sustenance of economic growth in India, RBI will also likely monitor the sharp appreciation in Indian rupee in the last few days as well as impact of strong crude prices on the overall fiscal health of the economy. Besides local factors, it will also be important to observe how the Greek crisis is resolved and that may have a further bearing on global risk aversion.

1-year rolling forward P/E, M3 adjusted valuation trading at full valuations

However, we firmly believe that India is on the cusp of a strong economic upcycle and therefore a correction in asset prices would provide a strong entry point for medium-to-long term investors.

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