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| Equity Markets |
| Being a consumption led economy, the strong consumption demand and spending on the infrastructure in India ensures the continuing strengthening of the economy's fundamentals and thus attracting more and more foreign capital. India's GDP grew 8.9% in the April-June 2006 quarter compared to an year earlier, boosted by manufacturing and services output. Agriculture which accounts for about 23% of GDP grew at an annual pace of 3.4 % in the quarter. Manufacturing output expanded by 11.3%, higher than the growth rate of 8.9% in January - March 2006 quarter. RBI has maintained the GDP forecast for 2006-2007 to be in the range of 7.5-8.0%; the central bank's forecast is substantiated by the IMF expectation that India is poised to grow at close to 8.0%. |
| The merchandise exports figures (cumulative for FY07) were 34% up at US$ 48 billion supported by strong manufacturing activity in the country. Strong Industrial Production growth (10.6%) and appreciating exports, along with close to normal monsoons, bode well for the Indian economy and the high growth rates fortify the underlying confidence in the equity markets. Though there may be a build up of risk factors following strong credit growth, much of it seems to have been discounted by the market participants. |
| Tax revenues of the value added tax (VAT) implementing states continue to show robust growth in fiscal 2006-2007. In the first five months of the current fiscal, tax revenues of the thirty VAT implementing states showed a rise 26.2% to Rs.455709 crore over the corresponding period of the previous year. The three non-VAT implementing states - Tamil Nadu, Pondicherry and Uttar Pradesh - showed a rise of 22.52% to Rs.113265 crore in tax revenues during April-August 2006. The increasing tax revenues, though indicates that the rationalization of the tax has been successful for the government, the vital point to note is the overall increase of income in the hands of consumers and manufacturers, an indicator of economic strength. |
| Globally, the equity markets have been witnessing a rally. Asian stocks have continuously risen and Dow Jones Industrial Index of USA closed at 11679 which is close to touch its previous high of 11725, which it touched in January 00'. Fed has refrained itself from raising the bank rate which has send positive signals around the world. Though inflationary expectations are still hovering, it is expected that previous hikes would control the price escalations. Also as the metal prices and crude oil prices have eased, the inflationary fear seems to be contained. It is expected that world economic growth might slow down in the current economic year but the effect on Indian economy could be minimal due to strong demand and its relative isolation from the other global economies. |
| Crude oil prices need a special mention. After crossing $75 a barrel, the prices plummeted to lows of $58 and then creeped up to again react at the levels of $62 largely on the back of reduced risk of possible large scale conflict between US and Iran. The development was a welcome sign as India imports about 75% of its total crude oil requirements. Oil plays a very crucial role in determining the prices of the essentials in the economy and any upward movement in the prices could lead to inflationary pressures. The markets have cautiously taken the note of above and have moved ahead, as the supply-demand equations around the world are close to balance out. It would be too early to take any stand on the movement of crude oil but the country appears quite comfortable with the current price levels. |
| We expect the corporate earnings to grow by a healthy double-digit figure in the current financial year. Indian industry has undertaken huge capacity expansion projects to meet the ever-growing demand in the economy. This fact when read in conjunction with current figures increases the expectations of buoyant markets, especially the equity markets. October 06' awaits the release of Q2FY07 figures by the India Inc. The market readings suggests that growth figures are likely to be in line with that of Q1FY07 which could further boost the persisting bullish tone in the capital markets. |
| After the much volatile sessions of August 06', equity markets found stability. The month of September was a period of exuberance for the investors as markets not only made efforts to regain the losses of May 06' but also did so on healthy volumes. Increased participation by the investors, riding on the firm belief in India's growth story, led SENSEX to close at 12454 (up by 755 points from the August 06' close of 11699 points). Any loss of the momentum or interest in the equities is not expected in near future. Net FII purchases in equity markets were at $ 1.16 billion for September 06', whereas the cumulative figure for 2006 is $ 5.0 billion. The faith of foreign investors in our economy remains unabated. |
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Debt Market |
| The Indian capital market has now witnessed two straight months of falling yields in the fixed income market. To put that into perspective last time we had two straight months of downward moving yields in April - May 2005 when the ten year GOI moved from 7.35% to 6.89%. Of course subsequently yields moved up to touch a high of 8.41% in July this year. |
| If August was the month of reversal of sentiments and a sharp drop in yields the month of September has been one of consolidation. The yield on the benchmark 10 year bond
has moved from 7.88% in the beginning of the month to close the month at 7.64%. |
| The month has been characterized by the bond rally expanding in market breadth as proven by the increasing turnover share of state owned banks and increasing SLR demand. We are observing greater market participation from treasuries of public sector banks who had so far stayed away from the government securities market. This coupled with increasing investor demand from insurance companies and mutual funds gave further impetus to the ongoing rally. |
| The market entered the month on a strong note. The government bond auction in the first week witnessed aggressive bidding and a cut off of 7.75% for the ten year bond while the 28 year long bond had a cut off of 8.45%. There was some profit booking in the second week. This was primarily because of advance tax outflows, the fear that the government may stop spending to meet its fiscal deficit targets and to the fact that the busy season for credit demand is upon us and their seems to be no perceivable signs of any slowdown in demand. This was compounded by adverse international pointers with the European Central Bank maintaining a hawkish stance and the US ten year showing slight hardening. As a result, the yield on the benchmark 10 year bond moved up to 7.83% in the mid month. The short term liquidity crunch also resulted in the short term rates moving northwards. |
| One of the major events of the month was the FOMC meeting and that provided the trigger for the resumption of the Bull Run. While the fed kept rates unchanged as expected, the post meeting statement was softer than expected. This lead to a rally in the US markets and the US ten year moved to its lowest levels in six months. Taking it direction from the US bond market the market rallied to breach the 7.60% yield for the 10 year benchmark. The sentiments were also alleviated by the lower crude oil prices which retracted from a high of $78/brl to briefly breach $60/brl before settling in the 60-63 $/brl range. |
| The 2nd half central government borrowing calendar has been announced by the RBI and is in line with market expectations. This further fueled the rally. |
| The OIS market underperformed the government bonds with the spread between the 5 yr OIS and the underling 5yr GOI bond narrowing to 38 basis points. This is primarily a result of the correction of the sharp spike in the government bond yields in the previous months. |
| With most other asset classes rallying, could the rupee be left behind? The status quo insofar as the US rates remaining unchanged and thus little chance of the interest rate differential narrowing, helped support the rupee as it closes the month below the crucial 46/$ mark. The other factor helping the rupee rally was the falling crude oil prices which eased the pressure on the Indian unit. |
| On the macro front M3 broad money supply grew at 19.6% well above the RBI target of 15% and poses a problem for the Reserve Bank in containing inflation. The GDP growth
for FY06 has been revised up from 8.1% to 8.4%. Credit growth continues at a healthy rate. These figures point to potential inflationary pressures. |
| With the market discounting the positives and no major immediate negative triggers round the corner we expect the bond market to trade in a range. The short end of the credit
curve could see a downward movement as liquidity returns to the system and mutual funds, which are the major players in this segment, receive inflows. |
| We continue to be optimistic about fixed income market and their ability to deliver healthy returns in the medium to long term. We have increased the duration of our liquid during
the month to take advantage of the higher yields and the expected fall in yields coming into October. The focus continues to be on liquidity and optimum duration management. |
