Near-Term Worries To Blow Over

A subdued global macroeconomic situation combined with domestic worries has resulted in the Indian equity markets remaining quite dull for the past few trading sessions. On the global front, renewed worries in the European markets and the worries about fiscal cliff in USA, and on the domestic front, lower-than-expected collection from the telecom spectrum auction kept the investors worried.

However, these concerns notwithstanding, there are a few positive factors that we are missing. On the US fiscal cliff front, before starting his three-nation trip to Asia, President Obama began a new round of deficit-reduction talks with top Republicans and Democrats in a bid to avoid automatic tax increases and spending cuts that threaten to hurl the country into a recession. We are of the opinion that the worries about the fiscal cliff are going overboard and that we can, in fact, expect some betterment ahead.

On the domestic front, economists are preparing for a further cut in GDP estimates for the year (FY13) to less than 6% from the current estimates of 6.5%. Further, bond traders are fearing a jump in government borrowing as the washout of a telecom auction (which could collect only Rs 9407 crore against the targeted Rs 40000 crore), due to which the government may end up in hot water.

The Finance Minister P Chidambaram’s upwardly revised fiscal deficit target at 5.3% of the GDP may remain elusive. This could make his objective of bringing down interest costs for businesses difficult, with the state expected to borrow more than what was budgeted for. Some leading research institutions like Goldman Sachs, JP Morgan, Nomura Securities and ING Vysya Bank are forecasting that the minister will breach his revised limit, pushing bond yields higher. The impact of the same is clearly visible, as yields on the benchmark 10-year bonds have surged by 3-5 basis points since the RBI’s October 2012 policy announcement. The central bank was sceptical about the FM’s arithmetic to control the fiscal deficit at the revised target. Bond investors are factoring in up to Rs 50,000 crore of excess borrowing this year from the budgeted Rs 5.6 lakh crore. The Finance ministry had said it may not breach the limit, which looks tough given its inability to boost revenues.

However, we are of the opinion that the government may curtail its expenses to keep the fiscal deficit under the expected limits. We can expect some divestment to happen in the second half of FY13. The September 2012 quarter results have been good, and we expect India Inc. to fare well in the December quarter as well. This would surely help the equity markets improve on the EPS front, ultimately making the valuations look more attractive. With the equity markets likely to recover, we expect the divestment initiatives to be successful. While it may not fetch the targeted Rs 30000 crore, the amount raised should still be good.

There are no threats to the country’s long-term story. India is still the second fastest growing economy in the world. What we see now are merely short-term worries, and staying put in such a situation would be advisable for investors.