Geo-Politics Again Takes Centre Stage

Indian equity indices witnessed a high amount of volatility yesterday despite Dr, Rajan acting as per street expectations. Rather this was the first time that everyone on the street unanimously expected that RBI would maintain a status quo leaving no scope for the Governor to give any kind of surprise. As expected the there has been no tinkering on the Repo rates front. However some amount of liquidity was infused as the RBI lowered the requirements for SLR. RBI at its Monetary Policy Review today kept key policy rates unchanged, but cut the SLR by 50 bps to 22%. The repo rate stands unchanged at 8% and CRR at 4%. This is the second consecutive time that the rates have been left unchanged due to stubborn inflation. The Reserve bank also cut the HTM ceiling to 24%. The broad expectation was that the RBI will keep the repo rate (at which it lends to banks) unchanged at 8%. This is despite a lower print for the Consumer Price Index (CPI)-based inflation for June. The latter rose 7.31% from a year earlier in June, compared with a rise of 8.28% in May. This is under RBI's January-end projection of 8%, though above its comfort level. Further, according to a private market survey, India's services sector grew at a slower pace in July because of moderation in order flows. The headline HSBC Services Business Activity Index stood at 52.2 in July, lower from June's 17-month peak of 54.4.

Amid all this the benchmark indices remained volatile. Sensex and Nifty indices ended higher amid short covering in late trades with auto and realty shares leading the gains as the SLR cut by the RBI would facilitate funding of credit to both these sectors. The Sensex surged 185 points to end at 25,908 and the 50-share Nifty ended up 63 points at 7,747.  

While this was scenario on domestic front on the global front some amount of weakness was seen in US markets. US stocks resumed a selloff, wiping out yesterday’s rebound and sending benchmark indexes to the lowest levels since May 2014, as energy shares tumbled and concern increased over escalating tensions in Ukraine. The Standard & Poor’s 500 Index slipped 1 % to 1,920.21, the lowest level since May 29. The index climbed 0.7 percent yesterday after the biggest weekly loss in two years. The Dow Jones Industrial Average lost 139.81 points, or 0.8 %, to 16,429.47. Volatility in the markets has increased significantly and is clearly visible from the fact that the Chicago Board Options Exchange (CBOE) Volatility Index jumped 12 percent. More than 6.5 billion shares changed hands on U.S. exchanges today, 13 percent above the three-month average. The higher amount of volumes makes the decline in US markets a worrisome factor. Apart from this, equity indices dropped early in the day as better-than-estimated services data fueled speculation interest rates may rise sooner than anticipated. Service industries in the U.S. expanded in July at the fastest pace since December 2005, according to data from the Institute for Supply Management, indicating the economy was building more momentum at the start of the second half of 2014. Another release showed factory orders rose 1.1 % in June, above economists’ estimates for a 0.6 percent gain. Concern has grown that the improving economy may force the Fed to raise interest rates sooner than expected.

As for the Asian markets, all leading benchmark indices are trading in red on account of re-emergence of geo political worries in Ukraine. Following the US equities, Nikkei is trading with cuts of more than 1%, followed by Hang Seng which I also trading in red with loss of 0.90%. Shanghai Composite is also trading with loss of 1.21%. Considering the weak clues from these indices even SGX Nifty is trading in red, down 28 points (0.34%).

All in all the correction in the Indian equities is likely to continue for some time. FIIs have taken a pause after a long haul of consistent investment and even the valuations were running ahead of peer indices. We expect Indian equities to open gap down today and remain under pressure at least in early hours of trade.