Diwali Sparklers On D-Street!

The last day of this week ushered in a happy Diwali indeed, with the Indian markets breaching their previous all-time high. The benchmark indices surged for the fourth straight session on Friday, with the Nifty closing 8 points up on 6307 and Sensex up by 32 points at its lifetime high of 21196 on a closing basis.

The week saw quite a few significant events. On October 29, the Reserve Bank increased the repo rate by 25 basis points to 7.75% and reduced the marginal standing facility (MSF) rate by 25 basis points from 9.0% to 8.75% with immediate effect. The apex bank kept the cash reserve ratio (CRR) unchanged at 4% of the net demand and time liability (NDTL) and increased the liquidity provided through term repos of 7-day and 14-day tenure from 0.25% of NDTL of the banking system to 0.5% with immediate effect. The reverse repo rate under the liquidity adjustment facility (LAF) stands adjusted to 6.75% and the bank rate stands reduced to 8.75% with immediate effect. While the markets moved higher immediately in reaction to the announcement, there longer-term implications remain to be seen.

With hydropower giant NHPC’s buyback spree of around 123 crore shares from its shareholders, the government is all set to corner around Rs 2050 crore (86.36% held with the government) as disinvestment proceeds. The company has offered to buy back shares at a price of Rs 19.25 per share, which will cost Rs 2368 crore in all. This will be 8.89% of its total paid-up capital and free reserve. As per company law, any company can spend 10% of its paid-up capital and reserve for capital payment towards buybacks.

The government has a target of Rs 40000 crore (only Rs 1300 crore has been generated so far) for disinvestment proceeds for this fiscal, and NHPC’s buyback offer is just the start. This will soon be implemented in many other PSUs like Coal India, IOC, BHEL, etc. However, the naysayers hold that this move can seriously stunt the growth of these companies too.

In the IT sector, Wall Street Journal reported that the US government is set to levy a huge fine on IT giant Infosys, claiming that the company had illegally placed workers on visitor visas rather than work visas at large corporate clients across the US. The IT giant will have to cough up as much as USD 35 million on charges that it had used ‘inexpensive, easy-to-obtain’ B-1 visas meant for short business visits instead of the ‘harder-to-get’ H-1B visas for bringing in an unknown number of employees for long-term stays. The imposition of fines on companies like Infosys brings out the one-sided approach to free trade that the US has.

Considerable positive FIIs flows were also seen, which helped in taking the Indian markets to a new high. FIIs seem to be placing their bets on the expectations of a new government, a stabilising rupee-USD balance and the hopes of inflation being tempered over the next quarters. During the last four trading sessions, FIIs poured Rs 4679 crore into the Indian economy. However, the domestic institutions have gone in for profit booking, having sold securities worth Rs 1251 crore from the market since November 25, 2013.

The broader markets closed the week on a positive note. The BSE Mid-Cap index closed with gains of 3.55%, while Small-Caps closed higher by 1.95%. On a sectoral basis, 11 of the 13 indices closed the week higher.

The positive movement on the bourses is expected to continue in the next week. Further, corporates will continue to report their second quarter results next week also. Hence, the likelihood of volatility cannot be ruled out depending on the financial results of the companies.