ECB, QE3 Lift Markets, FDI in Aviation And Retail Allowed

This was the perfect week, one that at least investors would remember. The markets gained on every day of the week and managed to make a remarkable gains of  4.21% gains.

There were all sorts of things in the week. The positive sentiment remained upbeat through out the week. The macro economic global data was very positive on the markets.

To start with the ECB chief Mario Draghi in the last week allowed the unlimited bond buying program that partially lifted the sentiment in the Europe. Draghi has said that the fund managers in the Europe are bringing back the money to Europe according to one of his interview published in the media. The Unlimited bond buying program will help the European countries to restore the confidence in the economy. Though initially there was a pressure from Germany, the German Constitutional Court has given its nod to the same.

In what can be called as a ‘foreseen by many’ event, US central bank, Federal Reserve has finally announced Quantitative easing (QE3) plan under which it will buy mortgage backed bonds and securities at the rate of USD 40 billion per month. Besides it has also said that it will try to keep the lending rates at the current levels until mid 2015. The Fed expects this will help to boost the growth as well as growth the employment level in the country. It also expects the unemployment to start coming down by next year, though this will cause some inflationary pressure in USA which seems a good problem to have rather than a slowdown in USA.

In the domestic markets however both the figures announced (IIP and WPI) indicate a worrying sign. Fist the IIP data showed that the industrial growth in the country remained absolutely flat at 0.1% for July 2012. From the period April to July 2012, the IIP data shows that the industrial production has shrunk by 0.1% which shows that there are no new investments in the country. The electricity sector, which had shown robust growth in earlier months, has also show a low level growth.

Another set of data, i.e. WPI inflation showed that in August 2012 the inflation in the country grew unexpectedly to 7.55%. In July 2012 data showed that the inflation has soften to 6.87% but the new data has completely erased the hopes of any action by the apex Indian bank on Monday. The combined picture in India is the growth has slowed down significantly while inflation is rising. Though the slowdown in growth shows that demand is declining, there could be upward push as we move towards the festival season.

The ECB’s bond buying plan and Fed’s quantitative easing will further increase the monetary supply that will lead to the rise in the commodity prices and will put the inflationary pressure on country's headline inflation. The government has also poured some fuel in it by increasing the diesel prices by Rs 5 per liter and also capping only six cylinders of the subsidised LPG. Both of which are positive for the government to cut the fiscal deficit, but are negative for the inflation which will only go up by few basis points.

The Government's action however must be seen positive as it will be very important to send a signal to the market that government is willing to show some courage in order to carry reforms in the country. Now it has tossed the ball in the RBI’s court to ease the policy rates in order to boost the growth. All eyes are on RBI which will announce its monetary policy review on Monday, 17^th September 2012.

During the week, due to the liquidity supply the rupee has shown appreciation against the dollar. The rupee after many weeks or may be months has come down to level of 54 against USD. The crude oil prices however have sharply gone up to USD 117 per barrel. The gold and silver prices mainly remained high during the week expect on Friday.

On the domestic capital markets front, it has been fireworks all the way. On the indices front, Metals saw gains of 6.3% while Realty sector jumped by 5.5%. The data shows that the construction has picked up again in the country which has lead to the jump in the sector. Healthcare sector on the other hand saw a decline of 0.18% while power sector has shown the sustained negative sentiment with decline of 0.38%. The coal ministry has also taken some action against the companies holding certain coal blocks which is very negative for the sector.

During the week, Panacea Biotech has shown fantastic gains of 91% on its new collaboration. The week also saw Infosys acquiring a Lodestone Holdings for CHF 330 million (about Rs 1927 crore). The auto major Tata Motors has also said that it will start Nano production in Indonesia while M&M will launch 5 new vehicles by 2015. Another auto company Hero Motocorp has done collaboration with an Italian firm for premium 2 wheeler vehicle category. In the Pharma space, Strides Arcolab has received US FDA approval for its Polish sterile facility while Ranbaxy has received approval to set another manufacturing capacity in Malaysia.

The troubled Deccan chronicle, which will go through the debt restructuring plan has tanked heavily in the week. The company is also set to sale the Hyderabad IPL franchisee.

Aviation stocks were in talks during the week as there were news of FDI in aviation to be approved by the government. Besides, SPiceJet is in talks with the gulf airlines for proposed stake sale. All aviation stocks surged during the week.

Ahead in the next week , all RBI will announce its monetary policy. This time there are firm thoughts from most of the brokerage houses the RBI will not cut the interest rates. Besides, as the inflation has shown surge, it is not practical to expect the rate cut . Today the truck freight has also been increased by the association by 15% that will raise the prices of the goods which will put further pressure on inflation, so we firmly believe that RBI will hold the rates.

Besides in a major decision, government has approved divestment in five PSU companies. It has also allowed FDI in aviation and Retail. This is a very positive and bold move by government which will keep the market very bullish next week.