The Sensex and the Nifty gained 7.21% and 7.84% respectively due to the Fed’s policy decision but lost momentum due to the repo rate hike by the RBI. The Fed’s decision to continue with the stimulus restored confidence in the emerging market assets. The INR appreciated 6.16% against the USD in the month of September 2013.The FII equity investments in India was at USD 2.09 billion for the month of September 2013 as against a USD 3.63 billion outflow that was seen cumulatively from June 2013 to August 2013. The FII investment inflows are expected to remain volatile on account of the second quarter monetary policy review hinting a further rate hike. The Q2FY14 results are expected to steer the markets in this month and it is expected that it would be positive for the export related sectors and negative for the import related sectors. Banks would be expected to post muted numbers on account of tightened liquidity conditions and hardened interest rates.
China’s benchmark index gained 3% in the last month on account of positive economic data led by manufacturing with the Purchasing Managers Index (PMI) rising to a 6 month high of 51.2 signalling a firm recovery in the Chinese economy. Recovery in the economic activity in the Eurozone also helped the German DAX index register a 5.7% gain in the month of September 2013.
Crude Oil prices declined 6.35% to USD 108/bbl due to ease in political tensions in the middle east and gold prices declined 5.31% to USD 1337/Oz on account of an economic recovery in China and the Fed’s decision to carry on with Quantitative Easing.
Federal Reserve (Fed) Policy Decision
The Federal Open Market Committee (FOMC) in its decision on 18th September decided to continue with the USD 85 billion bond purchases every month to stimulate the US economy for a sustained recovery. The US economy has been expanding at a moderate pace along with an improvement in the labor market conditions but the Unemployment rate at 7.3% is well above the Fed’s comfort levels. Household spending and business fixed investment have advanced and housing sector is showing recovery but the mortgage rates that have risen from 3.40% in April 2013 to 4.6% as of September 2013 could derail the incipient housing sector recovery. US tight fiscal policy stance also hinders economic growth. The CPI inflation below the target rate of 2% is still not a healthy sign for the economy and could pose risks to the economic performance. The FOMC decided to therefore continue with the purchase of mortgage backed securities at a pace of USD 40 billion per month and longer-term Treasury securities at a pace of USD 45 billion per month. The Federal funds rate range stays at 0% to 0.25% until the unemployment rate remains above 6.5%. The Fed would also maintain its policy of reinvesting principal payments from its holdings of agency debt and agency mortgage backed securities and rolling over maturing Treasury securities to support the economy. The tapering of the asset purchase program would now depend on the economic recovery in the near future.
The major currencies strengthened against the USD on the back of the Fed’s policy decisions. Emerging market witnessed an inflow of funds as investors took this opportunity to buy into beaten down emerging assets. The Japanese Yen remained flat on a month on month basis at JPY 98.24 per USD but the Euro appreciated by 2.07% to USD 1.3520 per Euro for the month of September 2013. The USD Index declined 2.03% to 80.27 last month on account of the weakness seen in the USD due to the Fed’s decision to continue with the stimulus.
RBI Mid-Quarter Monetary Policy Review
The Wholesale Price Index (WPI) inflation was reported at 6.1% in the month of August 2013 against 5.79% seen in the month of July 2013. The food inflation was reported at 18.2% in August 2013 against 11.9% in July 2013, fuel inflation remained flat at 11.3% in August 2013 and the manufactured products inflation came in at 1.9% in August 2013 compared to 2.8% in the month of July 2013. The Consumer Price Index (CPI) inflation was reported at 9.52% in the month of August 2013 against 9.64% seen in the month of July 2013. The RBI in its mid-quarter monetary policy review last month decided to hike the repo rate by 25 basis points (bps) to 7.5% from 7.25% due to inflation concerns for the Indian economy. Measures that were introduced to contain the INR volatility were rolled back partially to ease the operational flexibility in the monetary system. The marginal standing facility (MSF) rate was reduced by 75 bps from 10.25% to 9.5% and the Cash reserve ratio (CRR) was reduced from 99% to 95% of the daily requirement. The further roll back in measures would depend on the exchange rate volatility as indicated by the RBI. The mention of the stable nominal anchor for inflation is positive in the sense that it would bring focus to the monetary policy and drive decisions based on specific economic data reported in the future. Concerns still remain on the possibility of an another 25 bps hike in the repo rate for the second quarter policy review in the month of October 2013 on account of elevated inflation levels of CPI and WPI.