Mohan Shenoi, President – Group Treasury & Global Markets, Kotak Mahindra Bank and Phani Shankar, Head Financial Markets, ING Vysya Bank talk to BW's Tanushree Pillai about the trend in the debt and money market and a give their forecast for bond yields and the rupee.Indian bond yields touched the psychological 9 per cent level and bounced back thereafter. What are the concerns in the bond market? Shenoi: The biggest concern of the government securities market is excess supply which far outstrips demand. There's a steady input of Rs 13000 crore of dated securities every week plus Rs 7000 to 8000 crore of State Development Loan every fortnight, weekly treasury bills' auctions plus intermittent issuance of Cash Management Bills.The market and primary dealer system do not have the appetite to underwrite and absorb such avalanche of supply of Government paper.Shankar: The heavy supply has brought in growing concerns the government will overshoot its fiscal deficit target of 4.6 per cent of GDP. Persistently elevated inflation also continues to keep bonds under pressure. Shenoi: Secondly, the banking system as a whole is maintaining statutory liquidity ratio at 29 to 30 per cent of their Net Demand and Time Liabilities (total deposits) as against the required level of 24 per cent. This has also dampened demand. Some banks have also announced that they will move away from Government securities to ‘AAA'-rated corporate paper in order to improve their Net Interest Margins. This is putting pressure from the demand side.What is the current trend in the overnight money market of collateralized lending and borrowing obligation (CBLO) and interbank call money market? Shenoi: Liquidity in money markets continues to be in the negative territory. Average deficit at the system level is around Rs 50000 crore. Hence, money market will operate at the upper end of the interest rate corridor. In other words, repo rate will continue to be the operative rate. CBLO and call money rates therefore will hover around the repo rate. How has trading been this past month in the overnight money market? Shankar: Liquidity has been in deficit mode, but largely within RBI's comfort zone. Trading has been fairly stable with CBLO rates trading near repo rate while interbank call rate trading about 5-10 basis points above repo rate.Shenoi: With liquidity in negative territory, trading in money markets has been negligible. What's your near-term and medium-term prediction for bond yields?Shankar: In the near term, bond yields are expected to peak around 9%, but the bond market should pare losses in the medium term to trend towards 8.5 per cent as supply concerns ease, with likely Open Market Operations purchases by the RBI and inflation trajectory starting to ebb slowly.Shenoi: The 10 year benchmark 7.80 per cent -2021 bond yield is expected to be around 8.75% to 8.85% in the next one month, while it may rise to 8.90 per cent - 8.95 per cent levels in the next three months. All eyes are on RBIs October 25th policy. With 12 rate hikes in about 18 months, and more expected, what are your expectations? Shenoi: We expect another increase of 25 basis points in Repo rate and a concomitant increase in reverse repo rate. Inflation is yet to moderate forcing the RBI to continue its anti inflationary stance.Shankar: We expect RBI to raise the repo rate by 25bps on 25th Oct as managing inflation remains the central bank's key concern. Inflation for the month of September (at 9.72 per cent) remained much above the central bank's comfort zone and its efforts to rein it in have not had much impact. Where do you think is inflation headed in the medium-term and by March-end?Shankar: Inflation trajectory is expected to start showing a downward trend in a months time. We expect inflation to be close to 7 per cent by March end. Shenoi: Headline wholesale price index is expected to be at around 7 to 7.5 per cent by March 2012. How is the demand for bonds and Treasury-bills currently and why? Shenoi: As the SLR holding of the banking system remains significantly higher than what is mandated by RBI, the appetite for bonds and Treasury-bills has been very limited.This limited appetite is manifesting itself into higher yields in successive auctions and devolvement in dated government securities auction.Shankar: The last two bond auctions clearly witnessed poor interest, with 2 out of 3 securities worth Rs 4038 crore on offer devolving last week, while in the previous week, securities worth Rs 899 crore devolved. Even Treasury-bill auctions have been witnessing higher yields than before. Along with over supply and high inflation, there are growing concerns that after an extra borrowing worth Rs 52800 crore already being announced for the second half of this fiscal, government might need to increase its supply further towards the end of the year to meet its shortfall. Where do you see the rupee headed in the next a) 1 month b) 3 months c) 6 months and why? Shankar: Rupee is expected to trade between 48.50-51 per dollar in the next three months. With risk sentiments easing and markets being less vulnerable, we expect rupee to trend towards 47.50 per dollar in the next six months.The movement in the domestic currency in the last few months has largely been driven by global factors as concerns of contagion risks in Eurozone threaten to destabilize the world economy. The rising risk aversion has led to drying up of foreign institutional inflows in India, with the net inflow being to the tune of USD 2.5 billion between April-October 2011 compared to USD 25 billion in the corresponding period last year. Not surprising, the Indian Rupee has weakened over 10% in the last six months.Shenoi: I am expecting a weak Euro which means risk aversion in global markets. On account of that I am expecting INR depreciation 49.80 per dollar in the next one month, at 50.80 to 51 per dollar in the next three months and at 50.30-.50 in six months' time.
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This week, stock markets will gyrate, perhaps more than they have in the last two. Here are three things: one, how the markets read the October 23 meeting of the European Union. So far the news looks bad. Two, what the Reserve Bank Of India will do about interest rate hikes: pause or continue. Opinion is divided about which way the central bank will go. But more importantly, look for what it says about the economic outlook for the financial year. Lastly, the tenor of corporate quarterly results. Here, pay more attention to the half year, not just the quarter. That will tell you how much catching up companies will have to do.Last week, as expected, the market reacted to the disappointing corporate results reported by blue-chip companies. The Indian markets lost 2 per cent with players offloading their stocks ahead of the crucial European Union (EU) nations meeting on 23 October 2011 that will meet to discuss the bailout of Greece and other heavily indebted European nations. "We will have to wait to see if the bailout package is for short-term or the long-term. It doesn't make sense if it's a 3-4 month stop gap arrangement," says Ambareesh Baliga, COO at Way2Wealth, a financial services firm.These are uncertain times and across the globe players are waiting to see what measures the European government takes to recapitalize the banking systems. The underlying fears of banking sector contagion still continuous to pose threats and the market aren't prepared for anymore failing of banks. There are doubts over the financial soundness of the banks because they lack confidence in the valuation of banking assets such as sovereign debt.While Monday morning Indian markets will follow its Asian counter parts, the coming week players will also key an eye on the Reserve Bank of India (RBI) monetary policy on 25 October 2011. Though the market has discounted a quarter per cent hike in rates, players are waiting to see RBI governor's future stance on inflation and rate hikes. Last week Brazil has cut its rates by a half per cent to spark growth and many feel India and other nations like China will soon follow. In India, expectations are if not a cut at least RBI would indicate of no more hikes following the slowdown in economic activity.Meanwhile, in the week ended 21 October 2011, the Bombay Stock Exchange (BSE) Sensitive Index (Sensex) ended with a loss of 297 points at 16,785.64. The disappointing results from index heavyweights — RIL, TCS and L&T were responsible for pulling the index lower which remained on a flip-flop mode for most of the week. "There is hardly any activity in the market. Players are holding on to their position and aren't committing any fresh money into the market," says Baliga. He adds: "Though the Sensex is moving in a narrow band of 1000 points. There is a lot of volatility and therefore players aren't willing to enter the market." This has also impacted volumes in the market. This month, on the BSE, the daily average turnover has dipped by 7 per cent to Rs 2,400 crore, compared to Rs 2,588 crore in September. The turnover is sharply down since January that used to record a daily average turnover of Rs 3,500 crore.On the other hand, despite uncertainty prevailing in the market on account of global as well as domestic concerns, Ramit Bhasin, managing director & head-markets, India at RBS is bullish on the Indian equity market. "The Indian market has held on very nicely despite the volatility and from a 2 to 4 years stand point I am bullish on equities and we are buying at current levels on expectation that it could give a return of 20 per cent in the next 18 months," says Bhasin. One of the reasons why he is positive on the market is because he feels all the bad news is factored in the price and secondly he sees core inflation stabilizing. Core inflation measures using exclusion method that excludes volatile items like food and fuel. But core inflation is said to be stickier as it includes prices of manufactured products which do not change very often.Meanwhile Baliga is also positive on the market. "Today 30 per cent of my money is parked in equities. And if market tanks, and there is all the possibility that market can tank by 10-15 per cent, I will remove money from debt and invest in equities in the ratio of 40 per cent equities and 60 per cent debt." He adds, "In terms of valuation markets are attractive. One can't time the market and therefore one should start accumulating quality stocks."Though experts feel that bad news is all discounted in the price and the clouds of uncertainty are getting lifted, a clearer picture would emerge only after Sunday's Euro-zone meeting that could make or break the Indian market in the next week. Post Script: A Silver Lining? On Monday, the sensex rose as much as 1.6 per cent early on Monday, with index heavyweight Reliance Industries and ICICI Bank leading the gains, as investors cheered renewed efforts to limit the euro zone debt crisis.At 9:16 a.m. (0346 GMT), the 30-share BSE index was up 1.55 per cent at 17,045.03 points, with all its components rising.The broader 50-share NSE index was up 1.54 per cent at 5,127.90.
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The Reserve Bank of India (RBI) warned on Thursday against accepting high inflation as the "new normal," adding that the outlook for the country's industrial sector remained uncertain amid high input costs and weak global conditions.In its annual report for 2010-11, the Reserve Bank of India (RBI) added that despite the recent correction in global oil and commodity prices, inflation remained high and could hurt growth.The RBI, which has raised interest rates 11 times since March 2010 but still faces inflation above 9 per cent, said becoming resigned to high inflation could push up inflationary expectations in the long term and ultimately lead to a hard landing for Asia's third-largest economy.The RBI expects inflation to remain high in the near term but start easing in the October-December period, although its inflation forecasts have consistently proven to be optimistic over the past year."As inflation starts going down and remains within a negative trajectory, which is what we are anticipating post-November-December, that changes the overall perspective on the growth-inflation balance," Subir Gokarn, the bank's deputy governor, said, commenting on the report.While a US credit rating downgrade this month has raised global growth worries, RBI Governor Duvvuri Subbarao has warned that upside risks to India's inflation were more pressing concerns for the short term, and it was too soon to change the central bank's anti-inflationary policy stance.Still, the RBI report said a further slowdown in global growth could put downward pressure on India's growth projection, which the RBI estimates at 8 percent for the fiscal year that ends in March."The outlook for the industrial sector in 2011-12 remains uncertain, with the downside risks outweighing the upside risks," the RBI said.The Reserve Bank also said India needed to raise fuel prices further, to contain the burden of subsidies if global oil prices stay at current levels. India raised subsidised fuel prices in June for the first time in a year.The RBI also said that though India had adequate foreign exchange reserves to handle external pressures, its current account deficit could be under pressure if the global economy weakens.India's current account deficit improved to 2.6 per cent in 2010-11 from 2.8 per cent the previous year and is expected to be within 3 per cent in the current fiscal year of 2011-12.(Reuters)
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Investors including a fund managed by Morgan Stanley and the Government of Singapore Investment Corp are in separate talks to buy a Mumbai property from textiles firm Alok Industries for about $200 million, two sources with direct knowledge of the matter told Reuters.The company has been looking to sell a building and the land it sits on in central Mumbai, said the sources, who declined to be named as they were not authorised to speak to the media.Sunil Khandelwal, chief financial officer of Alok Industries, told Reuters that the company is in sale talks for the assets with several funds, but no decision has been made.Both Morgan Stanley and GIC declined to comment.Other Mumbai textile firms including Bombay Dyeing, Century Textiles, Provogue India, and Arvind Ltd are also trying to sell or develop real estate assets in India's financial capital, where office towers have sprouted on the sites of former textile mills.Private equity investment in Indian property is down slightly this year to about $784 million, from $817 million at the same time last year, data from VCCircle.com, an industry tracker, showed.Domestic fund houses including Kotak Real Estate Fund, IndiaReit and ASK Investments are all in the process of raising funds totalling about $1 billion, fund officials have told Reuters.(Reuters)
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The Reserve Bank of India (RBI) is likely to continue with its tight monetary policy stance to fight inflation and affect another hike in key interest rates in September, even though the global economic environment is on a downslide, believe experts.However, while the RBI is likely to go for another interest rate hike at its next mid-quarterly policy review on 16 September , it will not be very aggressive, the experts said.According to global research firm Macquarie economist Tanvee Gupta Jain, "While the RBI will continue on its anti-inflationary stance, adverse global environment suggests that it might become less aggressive." Global investment banking major Morgan Stanley also thinks, "The RBI will continue with its anti-inflationary stance with one more 25 basis points hike in order to anchor inflation expectations decisively, barring a further deterioration in the growth outlook."The RBI, at its last review meet in July, raised the repo (borrowing) rate by 50 basis points to 8% and the reverse repo (lending) rate by 50 basis points to 7%. The Apex bank has hiked the key policy rates 11 times since March, 2010, to curb inflation, which has been hovering above the 9% mark since December last year.Headline inflation stood at an eight-month low of 9.22 per cent in July. However, this was much above the Reserve Bank's "comfort zone" of around 5%.Despite several interest rate increases, the rising discretionary income of the middle class is likely to exert upward pressure on inflation, say experts.In its Economic Outlook for 2011-12, the Prime Minister's Economic Advisory Council (PMEAC) had projected inflation to remain high at around 9% till October, before moderating to around 6.5% by March, 2012. Notwithstanding the adverse global economic scenario, better-than-expected June factory output data is likely to prompt the RBI to go for another round of rate hikes.The Index of Industrial Production grew by 8.8% in June, 2011, compared to 7.4% in the corresponding period last year.However, recent negative global developments like the sovereign debt crisis in Europe and increasing concerns that the US economy may slip into recession after its long-term debt rating was lowered a notch to AA+ by Standard & Poor's are expected to eventually affect the Indian economy to some extent, the experts believe.(PTI)
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Last week, Greece once again dominated the global financial market as fears of a new crisis emerged after the Greek Prime Minister called for a referendum on the bailout deal. Though there wasn't any major activity in the Indian stock market, it corrected itself to end the week lower by 1.4 per cent.With fund flows virtually coming to a standstill amid growing jitters over the fate of Greece and its fallout on the Euro-zone economy, the Indian markets now await the release of September IIP numbers that is expected to be unveiled on coming Friday, 11 November 2011. The market is eagerly waiting for the winter session of Parliament starting on 22 November 2011. Expectations are high on re-initiating the reforms process. "Affirmative action from the government on reforms and on investments will be the pre-requisite for the markets to move up sustainably," says Dipen Shah, head of fundamental research at Kotak Securities. He, however, believes that in the coming week the markets will continue to be influenced by the developments in Europe while at home, the inflation and the IIP numbers will be important. Meanwhile, last week the market remained volatile with the Bombay Stock Exchange (BSE) Sensitive Index (Sensex) moving from positive to negative territory and back following global cues particularly on news from the Euro-zone. For the week ending 4 November 2011, the Sensex fell on low volumes to end at 17,562.61, down 1.4 per cent or 242 points. In the past five trading sessions, the sensex recorded an average daily turnover of Rs 2,248 crore, compared to last six months daily average turnover of Rs 2,615 crore. The mood among investors remained subdued as inflation continued to rise with food inflation jumping to a nine-month high crossing 12 per cent. Last week, petrol prices were also hiked by nearly Rs 2 per litre.Though the Indian market has discounted most of the bad news, global as well as domestic uncertainty continue to looms over it. Last week too, FII flows remained subdued to the tune of $129 million in the four trading sessions till 3 November 2011. Last week's rate cut by the European Central Bank by 25 basis points to 1.25 per cent and indication of another stimulus package after the Federal Reserve chairman Ben Bernanke said he was prepared to use monetary tools, may sound good for the markets. The fact is with global economy in a tailspin and indication of mild recession in Europe and slowdown in China, is likely to decrease the risk appetite among investors and flows into emerging markets like India.With India Inc expected to take another 2-3 quarters to deliver good performance, the next trigger could be an unexpected surprise from the government announcing reforms to boost investments in the country. Though it's a good time to build a portfolio for a long-term, but in the immediate short to medium term, Indian markets are expected to remain subdued and volatile and any bad news will see market drifting down.
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This week, Hyderabad-based Bhartiya Sammrudhi Finance (BFSL) sprung an ugly surprise on the country's already troubled microfinance sector. Founder and CEO Vijay Mahajan announced in a newspaper interview that without a fresh infusion of funds, India's oldest microfinance institution (MFI) could fold in less than three months. At the core of the problem lies accumulated bad loans worth Rs 450 crore in Andhra Pradesh that the company has been unable to recover from borrowers. The reason for this, according to the company, is a state government enforced law in October that restricts MFIs from collecting money from borrowers on a weekly basis. Mahajan is now in the market to raise over Rs 1,400 crore in equity and debt capital in an attempt to try and salvage the company. He's most likely to turn to private equity (PE) investors to bring in the equity component. PE investors have bankrolled MFIs for nearly a decade, pumping in $494.9 million (over Rs 2,000 crore approximately) between 2005 and now, according to Delhi-based financial research provider VCCEdge.However, for PE investors, microfinance no longer holds the allure it did prior to the SKS Microfinance initial public offering (IPO) in August last year. Hyderabad-based SKS, currently the country's largest MFI, has been wracked by problems since the IPO and its share price has plunged from over Rs 1,000 per share last August to around Rs 430 now. Complaints against SKS' recovery practices led to a crackdown on MFIs active in Andhra Pradesh and subsequently the law that seems to have sounded the death knell for Basix.If Basix does fold as Mahajan predicts, PE investors will have to worry about protecting their existing investments rather than make fresh ones. Basix itself has a posse of such investors including International Finance Corporation (IFC), Matrix Partners, Aavishkaar and Lok Capital. Mumbai-based Matrix is the most recent entrant in the company, leading a Rs 118 crore investment round in April 2010. The firm could not be reached for comments.Click here to view graph 1Click here to view graph 2
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HSBC's asset management arm is still seeing net inflows into its Asian funds even with the current market volatility, with investors increasingly picking fixed income over equities, a senior executive said on Thursday.There is also growing interest in Asian high-dividend-yielding stocks, with the recent market correction pushing investors towards such funds, Joanna Munro, the Asian chief executive of HSBC Asset Management, told the Reuters Global Wealth Management Summit in Hong Kong."Many retail investors now want to see the safety of a monthly income from their funds, which gives them comfort," she said. "Demand for emerging markets is still strong, but generally the trend is towards products with an income."HSBC's asset management arm in Asia had over $60 billion in total assets under management at the end of June. Globally, it had over $450 billion in AUM at the end of the first half of this year.The investment manager is also looking to setting up an offshore yuan fund targeted at North American institutional investors, following a strong response from European investors for a similar fund based in Luxembourg.The recent volatility in the offshore yuan market has also not dampened investor interest in putting their money into funds denominated in the Chinese currency, Munro said."In Hong Kong, you can buy renminbi off the street and hold on to it," she said, referring to the Chinese currency by its other name. "In the U.S. and Europe, it isn't that accessible so this is going to be a very attractive asset class."She also said she was still overweight equities, with many stocks looking cheap following the recent market volatility."In 2009, people came back to risky assets very quickly after the crash," Munro said. "It can be difficult with so much confusion, but take a step back and look at the long-term fundamentals."(Reuters)
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