A Red Day Ahead

Welcome back after a very short break. This break assumes significance in the light of the fact that, India completed 66 years as an independent sovereign nation yesterday. That is a really long period of time so to say, and hence, calls to reflect upon our achievements as a nation in the correct perspective. All this surely sounds like a sermon coming straight out of a politicos speech, but the intent of it is to draw your attention towards the developments happening, particularly with reference to the economy in general and the financial markets in particular.

The authorities are doing all they can to improve the on-ground situation. The RBI has announced a slew of measures which on one hand are a means of encouraging foreign fund inflows while on the other will discourage outflows. From doing away with the ceiling on certain foreign deposit rates and hiking it in case of some types to allowing banks to keep incremental foreign deposits outside of the purview of the CRR and SLR requirements the RBI is going all out to ensure that the stability of the rupee. However, what is intriguing is the measures it has announced to discourage outflows. The automatic route approval for foreign investments by Indian companies has lowered to 100% of the firms’ networth. In another move it has capped remittances from individuals to USD 75000. Those planning to buy a house outside of India will have to wait for now as the purchase of immovable property through the liberalized remittance scheme has been stopped for now. We seem to be taking one step forward to save the rupee from further eroding in value, but this is like taking three steps backward into the past where capital flows were fairly regulated. Well the Finance Minister has gone on record this morning ensuring that these measures are temporary in nature and that there is no intent of controlling capital flows. The hope now rests on these measures to work the purpose for which they are intended.

With just one trading session to go before we end this week, it would be interesting to watch how the markets react to these developments. The measures taken to suppress outflows of the dollar seem to far outweigh the measures taken to boost inflows. India Inc, particularly companies with plans of investing abroad in a bid to beat the slowdown blues will be impacted badly. With the corporate results not being so good these macro measures are sure to have a negative impact on the overall market sentiment.

Global markets haven’t been encouraging yesterday. Fears of the US tapering off the bond buying have emerged yet again. European markets snapped a five-day winning streak to end lower yesterday. In the US the Dow dropped over 200 points on economic data that was released. Positive economic reports brought back fears of the Fed tapering off its bond buying and this has seen the markets not just in the US but elsewhere too getting jittery.

Asian markets are following their global peers today. Most of them have opened on a weak note except for Taiwan which is seen trading in the green currently. Japan has been leading the fall with the Nikkei having lost more than a percent since morning. Korea, Malaysia, Indonesia and Hong Kong are all trading in the red and so are Singapore and China. The SGX Nifty which is a much closer indicator of what can be expected of the Indian markets too is trading down 40 points.

Not much is needed to figure out where the Indian markets will open today and the way they will trade. You could see a gap down open and a negatively biased day of trading for the close of the week. The weekend could be focused on more systemic issues which primarily includes the NSEL fiasco. Watch this space for a detailed analysis on what really happened in the NSEL case and what more could, thereby impacting the overall markets.