Friday Podcast 29th March 2013
Transcript of the Podcast
Hi this is your editor Arjun Parthasarathy speaking.
This week’s Friday Podcast topic is on “Market Analysis April 2013- Will Fiscal 2012-13 repeat itself in Fiscal 2013-14”
Indian equities and bonds have done well in fiscal year 2012-13 despite the macro economy seeing headwinds and the Indian Rupee (INR) showing weakness. Will markets continue to do well in fiscal 2013-14 or will the weak economy catch up with the markets? Let us analyse the outlook for Sensex, Nifty, government bonds and the Rupee for the new fiscal year starting April 2013.
The Sensex and Nifty have returned over 8.5% in fiscal 2012-13 while the ten year bond yield has dropped by 60bps. The INR has weakened by 7% against the USD. India’s GDP growth has come off from 6.2% levels seen in 2010-11 to 5% levels in 2012-13. Current Account Deficit (CAD) has deteriorated from 4.2% of GDP to 4.6% and higher over the last one year. Fiscal deficit has improved from 5.9% of GDP seen in 2011-12 to 5.2% of GDP for 2012-13. Inflation as measured by the WPI (Wholesale Price Index) has come off from 7.5% levels seen in April 2012 to 6.9% levels as of February 2013.
The positive performance of the Sensex and Nifty was driven by FII flows of around USD 22 billion in the April 2012 to March 2013 period. Fall in government bond yields were driven by repo rate cuts of 100bps as RBI eased monetary policy. RBI bond purchases of over RS 150,000 crores accounted for 27% of gross government borrowing for 2012-13 and this helped bond yields trend down.
FII flows did not help the INR as the rising CAD had a more telling effect on the currency.
Going forward, will FIIs continue to buy Indian equities? Will RBI cut rates? Will INR show strength? FIIs will continue to buy Indian equities on the back of global central bank liquidity and on the back of extremely low interest rates in the major economies. Central banks in US, Japan and Eurozone are buying bonds and keeping rates at record low levels and this liquidity is finding its way into economies such as India that are struggling but have a positive growth outlook in the future. FII flows will help equities trend higher though volatility is not ruled out on political issues.
Government bond yields are likely to fall, as RBI is likely to cut the repo rate by 50bps or more in fiscal 2013-14. RBI will cut rates on the back of stability in global commodity prices (Oil is down 11.5% in fiscal 2012-13 and is likely to stay down on higher oil production in the US) and on the back of weak GDP growth.
The INR is likely to strengthen from levels of Rs 54 to the USD as the CAD peaks out in fiscal 2012-13 and trends down in the coming fiscal. Stable oil prices, weak economic growth and capital flows will help pull up the INR.
Overall outlook for Sensex, Nifty, Ten Year Government Bond and the INR is looking more positive than negative. Risks are present in the form of mid term polls, weak monsoons and global economic issues. Stay positive on markets but unwarranted risks should not be taken, as volatility will be high.
Thank you for listening in. Have a good weekend.