Markets Looking For Bold Reforms

(RTTNews) - With FII flows into India slowing down a bit and investors waiting for the Narendra Modi government to deliver sweeping economic reforms promised during the Lok Sabha election campaign, falling oil prices failed to prop up investor sentiment in the week gone by.

India's benchmark index Sensex tumbled over 1,100 points or nearly 4 percent to end at 27,350.68 during the week ended December 12, its worst weekly loss in three years, as broader dollar strength rather than rupee weakness kept investors worrying about potentially destabilizing hot money flows.

The 50-share Nifty index dropped over 300 points or 3.7 percent to settle at 8,224.10 ahead of next week's FOMC meeting that could provide some key clues on when the U.S. central bank will raise short-term interest rates.

The Indian markets ended Monday's session on a downbeat note, with the Sensex and Nifty indexes losing more than a percent each, as investors sold off IT stocks alarmed by a large stock dump from Infosys founders, who are involved in venture capital funds and charitable activities. Fresh weakness in rupee in the aftermath of an upbeat U.S. jobs report and gloomy economic data from China and Japan also took a toll on investor sentiment.

Shares fell across the board on Tuesday, with metal stocks hit hard, as weak Chinese, Japanese and German economic data and falling commodity prices stoked concerns over the outlook for global economic growth. Domestically, India's current account deficit for the July-September quarter widened to $10.1 billion from $7.8 billion in the first quarter, because of a sharp rise in gold imports and a fall in export growth, official figures showed.

However, with oil prices coming down sharply over the past few weeks, the government as well as the Reserve Bank of India (RBI) exuded confidence that the current account deficit will be brought under control. To a question on gold imports, Finance Minister Arun Jaitley said that over-regulation of gold imports could push the yellow metal into the grey market.

The Sensex and Nifty erased early losses to end marginally higher on Wednesday after rating agency Moody's said India will have stronger GDP growth in 2015, driven by largely domestic demand, in the face of slower growth in China, a recession in Japan and stalled growth in the euro zone.

Separately, Standard & Poor's Ratings Services said in a report on Asia Pacific region's credit outlook that India has emerged as the brightest spot in the Asia Pacific region since its last report. A Credit Suisse Research report had said earlier in the week that the Indian economy will see the fastest USD nominal growth in the world in 2015.

Oil explorers led the declines on Thursday after Brent crude prices fell below $65 a barrel on renewed signs of slack demand for crude and ample supplies. A lack of consensus between the Centre and states on the draft Goods and Services Tax (GST) Bill and weak global cues sparked by China's tightening of lending rules and concerns over the political situation in Greece also dampened sentiment, pulling down the Sensex and Nifty to six-week lows.

The Sensex and Nifty fell for a fifth session in six on Friday, as oil explorers extended losses on relentless slide in crude prices and investors pondered the potential of additional capital outflows in the context of a faster-than-expected rise in U.S. interest rates.

Official data released after market hours showed that India's industrial output unexpectedly contracted an annual 4.2 percent in October, a three-year low, while retail inflation slowed for the fourth consecutive month to a historic low of 4.36 percent in November, piling pressure on the central bank to lower borrowing costs to aid a revival.

RBI Governor Raghuram Rajan had a meeting with the finance minister on Friday, but what transpired between them was not known. Rajan doesn't seem rattled by calls for rate cuts as he believes that interest rate action alone could not lift the economy.

The Modi government is facing criticism over what some view as a slow pace of economic reforms. The wait for 'achche din' continues, with investors looking at some bold measures to amend archaic labor laws and cut subsidies on fertilizer and food.

The Lok Sabha on Friday passed the Coal Mines Bill, meant to bring transparency in coal-block allocations. However the Bill could run into trouble in the Rajya Sabha, where the NDA government doesn't have a majority.

The Insurance Laws (Amendment) Bill and the Companies Amendment bill will be introduced in Parliament next week, with the chances of passage of the controversial Insurance Bill looking bright now after the government succeeded in enlisting the support of the Congress.

In the forex market, the Indian rupee weakened to over ten-month low of 62.50 against the dollar on Friday before finishing a tad higher at 62.29 on suspected RBI intervention. Many analysts see the rupee outperforming in 2015 as the government moves ahead with major reforms.

According to media reports, the government expects to save at least $12 billion on energy costs when Arun Jaitley presents his second Budget in end-February. Besides the substantial savings on the fuel subsidy bill, proceeds from disinvestment, spectrum sales and special dividend from public sector companies could help the government meet its fiscal consolidation goal for 2014-15.

The RBI has already signaled that an interest rate cut could come in early 2015. Many expect the central bank to cut rates in March if inflation continues to soften and the government controls its fiscal deficit.

A slew of banks including SBI, Canara Bank, ICICI Bank, Axis Bank and HDFC Bank have lowered their deposit rates in the last two months, citing excess liquidity in the system and inadequate demand for credit. Amid this backdrop, banks are likely to follow suit if the RBI cuts the repo rate.

Asked about the broad contours of the direction the Budget for 2015-16 will take, Jaitley said last month that it will contain a whole set of second generation reforms. "Budget is not the only opportunity but is an important opportunity" for the government to put the economy back on a solid growth patch, he said. Investors are waiting to see if the Modi government would keep its promises.