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GDP downward revision makes market see red

Key benchmark indices slid in the red zone reacting sharply to revised growth estimates by Prime Minister’s economic panel while broader markets continue to be firm. At 11:25am, the BSE Sensex was down by 31 points trading at 19,750 levels while NSE Nifty gained by 6 points at 5,844 levels. Broader markets remain firm; BSE Mid cap and small cap are up in the range of 0.3-0.5%. Prime Minister’s Economic Advisory Council (PMAEC) has pegged India’s Gross Domestic Product (GDP) growth at 5.3% for the current financial year. This is way down from their earlier estimates of 6.4% but higher than sub-5% growth projected by various brokerage firms and independent economists. C Rangarajan, Chairman of PMEAC said in a press conference that controlling CAD remains a major concern for the government and pegged FY14 CAD at $70 bn or 3.8% of GDP. BSE IT and FMCG indices have declined by nearly 1% each. However, BSE Capital Goods, PSU, Power and Realty indices have gained by 1% each. The main losers on the Sensex at this hour include Wipro, HDFC Bank, HDFC, Bharti Airtel, ITC, Maruti Suzuki and Infosys, all declining between 1-3%. Capital goods shares remain positive on announcement of better-than-expected July factory output data. Index of industrial production (IIP) rose by 2.6% in July on a y-o-y basis after falling for 2 consecutive months.

PM’s council pegs FY14 GDP growth at 5.3%

Prime Minister’s Economic Advisory Council (PMEAC) has pegged India’s Gross Domestic Product (GDP) growth at 5.3% for the current financial year. This is way down from their earlier estimates of 6.4% but higher than sub-5% growth projected by various brokerage firms and independent economists. C Rangarajan, Chairman of PMEAC said in a press conference that containing the fiscal deficit within the budgeted target of 4.8% of GDP could be a challenge. In order to achieve the 4.8% fiscal deficit target, action will have to be taken during the year particularly in the case of subsidies. Talking about the food security Bill’s burden on the fiscal deficit, Rangarajan said, “As far as current year goes, the burden will not be heavy because implementation will take time.” He added that there should be a cap on the total subsidies. “If food subsidy is paramount then other subsidies should be brought down consequently”, Rangarajan said. Rangarajan projected FY14 CAD at $70 bn or 3.8% of GDP. The Council attributed the rise in CAD to gold and oil. “Agriculture will grow at 4.8% as a result of well distributed monsoon,” he said. Agriculture grew at 1.9% in 2012-13. He added that industries is projected to grow at 2.7% in 2013-14. Manufacturing has been pegged at 1.5% for the current financial year while services are projected to grow at 6.6%, PMEAC said. The PMEAC forecast the wholesale inflation at 5.5% for the current financial year. “Good performance of agriculture will have moderate impact on inflation, however, depreciated rupee can add pressure to this”, the Council said.

RBI tightens rules for lending against gold

The Reserve Bank of India (RBI) has tightened rules for finance companies which lend against gold, a fast-growing business in the country, in line with the recommendations of an internal panel. The RBI said lenders need to value the pledged gold at the average closing price of 22-carat gold for the preceding 30 days as quoted by the Bombay Bullion Association Ltd, to arrive at the loan-to-value ratio. The ratio would remain at 60% for loans against jewellery. “Currently, there is no standard method for arriving at the value of gold accepted as collateral and valuation is arbitrary and opaque,” the central bank said in a notification issued late on Monday. Shares of gold-based lenders slumped, with Muthoot Finance Ltd falling 6.4% and Manappuram Finance Ltd down 3.7% on Tuesday. The central bank also streamlined the process by which lenders auction gold when a borrower defaults, saying lenders need to declare a reserve price for the pledged ornaments. Lenders would also need RBI approval to open branches exceeding 1,000. No new ones would be allowed without adequate storage facility for gold. “Unbridled growth may not be in the overall interests of the concerned NBFC or the sector and there is a need for consolidation of the existing network,” the central bank said. Muthoot Finance has 3,801 branches and Manappuram Finance has 3,293, according to their websites. A Muthoot spokeswoman did not have immediate comment, while an official from Manappuram Finance was not immediately reachable for comment.

FIIs buy almost a billion as sell-off fears recede

Foreign institutional investors have been bought back around 25% of their total sales over the June-August period in the last eight sessions of trade. Recent currency appreciation may bode well for flows if previous trends are anything to go by, according to a Deutsche Bank report entitled ‘Fears of FII capitulation receding.’ “A rupee depreciation of 13% between Sep and Dec 2011 was followed by a period of FII inflows cumulating US$8bn over the next 3 months. Similarly, INR depreciation of 11% over Mar-June 2012 was followed by FII inflows of US$6bn over next 3 months,” said the report authored by Research Analysts Abhay Laijawala and Abhishek Saraf dated 16 September. The analysts suggested that while it may be premature to call a reversal, investors would now look to the Fed policy on September 18 and the Reserve Bank of India’s credit policy on September 20th. The analysts expect a reversal of earlier tightening steps by the RBI. “In July 2013, RBI effectively increased the cost of money for banks by raising the Marginal Standing Facility (MSF) rate by 200bps from 8.25% to 10.25% and also capped the amount of money that banks could borrow at repo rate (7.25%) at 0.5% of liabilities (from no cap earlier). Both or at least one of steps may be eased/reversed which will bode well for equity markets and banking stocks in particular,” said the duo. They were net buyers by $912.92 million in the last eight sessions, according to data from the Securities and Exchange Board of India.

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