Markets volatile ahead of FOMC outcome

Markets have turned volatile in morning deals as investors will be counting on the Federal Reserve to launch only a modest scaling back of stimulus later in the day.

At 1055 hours, the Sensex was up 19 points at 19,823 and the Nifty was flat at 5,853.

The gains were aided by Reliance Industries, ITC and HUL.

In the broader markets, the mid and smallcap indioces advanced and was up 0.3-0.5%.

On the sectoral indices, IT, Power and Auto indices were the only indices in the negative.

Will the Fed start its famed taper in September?

 
64% of 800 investors polled think it will start this week but weak US data suggest it might not be aggressive.
Two big events this week - the Federal Open Market Committee (FOMC) meeting on Wednesday and RBI's policy review on Friday - will determine which way equity markets head.
Since June, the Federal Reserve has been looking to taper its $85 billion a month bond buying programme. The FOMC's meeting is crucial for emerging markets like India because over the last few years, financial markets have been fuelled by easy liquidity.

Since 2009, $100 billion has flowed into Indian equities. Not surprising, then, that the talk of a possible taper from this month has sent risk assets and commodities into a tailspin.
So, are the taper related fears unfounded or are they real? To begin with, markets have already priced in some tapering from this month. However, if the Fed tapers its bond buying by $10 billion, the impact on financial markets would be negligible.
But if it is higher than $10 billion, markets may roil. According to a Barclays survey, conducted among 800 global investors, 64 per cent of respondents believe tapering will start this week and almost all of them expect it to occur before the end of the year.

Investors now perceive the removal of Fed stimulus will start earlier, the survey says. Forty five per cent expect the Fed to finish their open-ended QE3 programme in second quarter of 2014, while most respondents in our June survey thought it would happen in the fourth quarter of 2014 or later.

Interestingly, most investors believe equities have become less attractive but have shown a slight increase in their preference for emerging markets and commodities from June.

Barclays says: "The perception of key risks has also shifted. Last quarter, a reduction in Fed policy stimulus was seen as the key risk for markets by nearly 40 per cent of survey participants; today, the number is just 26 per cent."
Several economists in the US believe concerns regarding a taper could be premature, as growth data continues to be weak and the Fed does not want "risk off" trades just yet.
Talks of a taper have pushed up interest rates in the US by over 100 basis points and any further increase would impact growth. For starters, it is believed growth has slowed in the third quarter (ended September) from the 2.5 per cent seen in the second quarter. Economic growth bottomed out in the fourth quarter of 2012 when it touched 0.1 per cent. While there is no doubt that growth is picking up, questions remain on how sustainable this would be without the stimulus.

Since the Fed met at the end of July, there have been 21 growth-related data releases. Of the 21 releases, 12 have been below consensus.

New home sales in the US in the month of July have fallen by 13.4 per cent. Bank of America Merrill Lynch says it's a close call but it is still in the December camp when it comes to the Fed's possible tapering.

'RBI unlikely to reverse liquidity tightening steps on Sep 20'

Mumbai: Reserve Bank's new Governor Raghuram Rajan may wait for signs of a sustained stability in the rupee and is unlikely to reverse the liquidity tightening steps at Friday's mid-quarter review, Standard Chartered Bank said Tuesday.

"While the rupee's 7.6 percent appreciation (against dollar) from September 3-16 is encouraging, the RBI might prefer to wait longer for confirmation of sustained currency stability - a key determinant of such a reversal," it said in a report here.

"A complete reversal of liquidity tightening measures on September 20 looks unlikely to us," it added.

In order to arrest rupee's fall, Rajan's predecessor D Subbarao in July had announced liquidity tightening measures, including a cap on banks' overnight borrowings which increased the short-term rates in the system.

The RBI reduced the banks' liquidity adjustment facility (LAF) borrowing limit from 1 percent of the total deposits to 0.5 percent and also asked banks to maintain higher average CRR (cash reserve ratio) of 99 percent of the requirement on daily basis.

The StanChart report, however, said the RBI might recalibrate some of its liquidity-tightening measures in the mid-quarter monetary policy review on September 20 to reassure the market that the steps announced are temporary.

According to the report, RBI Governor could reduce the daily minimum CRR balance from 99 percent, or marginally increase the LAF borrowing limit from 0.5 percent of net demand and time liabilities (NDTLs).

"These changes are unlikely to reduce the call rate substantially below the MSF rate which is at 10.25 percent, but we believe they would offer some comfort to the markets, with the hope of further easing later," it said.

StanChart eThe report said the RBI may adopt a wait-and-see stance on September 20 given that the government is yet to announce measures to contain the fiscal deficit at 4.8 percent of GDP.

In the first four months of FY'14, the fiscal deficit reached a level equivalent to 60 percent of the budgeted target. StanChart expects the US Fed to taper its quantitative easing by USD 10 billion per month and maintain a relatively dovish policy tone.

"If the RBI only fine tunes the existing liquidity framework and reiterates its intent to gradually exit the tight liquidity regime, then we expect a limited market response," the report said.

"The markets will then watch closely for signals from the new Governor on the timeline and possible preconditions for a roll-back of liquidity-tightening measures," it said.

The report said given the uncertainty over the RBI's potential monetary policy responses, it remains neutral on government securities duration.
xpects the RBI Governor to stay hawkish on inflation front as August CPI inflation remained elevated, and moreover, WPI inflation accelerated to 6.1 percent. "The headline number is likely to keep the RBI cautious."

Rate cuts may be delayed with RBI focus on rupee: Barclays

New Delhi: With the Reserve Bank's policy focus geared towards supporting the rupee, the central bank may delay easing rates to between December and April 2014, a Barclays report says.

According to the global brokerage firm, the RBI is likely to remain focused on supporting the rupee, which has depreciated by more than 13 percent since May and crossed the psychological level of 62 against the dollar last week.

"As such, while the focus is on the INR, we think monetary policy calibration will eventually be biased towards further easing, rather than tightening. However, we think further policy easing will likely be delayed," Barclays said in a research note.

The financial services major believes key policy rates would be eased by as much as 75 basis points in this fiscal but it would be a "delayed" affair.

"We still expect 75 bp of repo rate cuts, but now we expect them to take place between December 2013 and April 2014, rather than our initial expectation of September -December 2013," Barclays said.

The industry has been demanding a cut in key policy rate to boost economic activities. Industrial output contracted for the second consecutive month in June.

Moreover, inflation rose for the second consecutive month and shot up to 5.79 percent in July, driven largely by double-digit rise in prices of food articles, including vegetables and onions.

The RBI, in its First Quarter Review of Monetary Policy on July 30, left all key interest rates unchanged.

The repo rate, at which the RBI lends to the system, was kept at 7.25 percent and the cash reserve ratio, the amount of deposits banks park with it, was unchanged at 4 percent.

The RBI is scheduled to hold its next mid?quarter review of policy on September 18.

FDI inflow up by 12% to $1.65 bn in July

 
New Delhi: Foreign Direct Investment (FDI) into India grew by 12 percent year-on-year to USD 1.65 billion in July, highest since April.

In July 2012, the country had received FDI worth USD 1.47 billion.

In April, the first month of the current financial year, the inflows stood at USD 2.32 billion, according to the data of the Department of Industrial Policy and Promotion (DIPP).

During the April-July period, FDI has grown by 20 percent to USD 7.05 billion, from USD 5.90 billion in the same period last fiscal, the data said.

The sectors that received large inflows during the first four months of the 2013-14 fiscal include services (USD 1.02 billion), pharmaceuticals (USD 1 billion), automobile industry (USD 637 million) and construction (USD 359 million).

The maximum FDI during the period came from Singapore (USD 2.21 billion), followed by Mauritius (USD 1.85 billion), the Netherlands (USD 520 million), Germany (USD 518 million), and the US (USD 371 million).

A DIPP official said that the recent steps announced by the government would further help in attracting FDI inflows and improving the investment environment.

The government has liberalised FDI policy in as many as 12 sectors which include telecom, tea and petroleum and natural gas.

FDI inflows in 2012-13 aggregated USD 22.42 billion, a decline from USD 36.50 billion in 2011-12.

India is estimated to require about USD 1 trillion between 2012-13 and 2016-17, the 12th Five Year Plan period, to fund infrastructure growth covering sectors such as ports, airports and highways.

Overall, an increase in FDI will help support the rupee, which depreciated to a record low of 68.8 against the US dollar on August 28. It has strengthened since then to 63 level.