Asia rising

Stock markets, currencies are doing well in the region

The current bout of appreciation in the value of the rupee couldn't have come at a better time for the Reserve Bank.

With the inflation rate reaching new highs every week, and with worries about the effect of higher interest rates on bank bottomlines, the perfect solution would be to allow the rupee to appreciate.

This would make imports, including all-important crude oil imports, cheaper in rupee terms, thus reducing inflation.

But why has the rupee started to appreciate once again? There are several explanations. Some dealers point to FII inflows as the main driver, and the Sebi figures show that FII inflows, including debt, have been $ 222 million so far this year, on top of $549 million in August.

Fourteen new FIIs were registered in August, and three more this month. Trouble is, these FII inflows made scarcely any difference to the rupee last month.

So what's special this month? One reason could be the higher FII inflows in the last few days. A more convincing one is that the arbitrage between the rupee market and offshore non-deliverable forward market has led to new inflows.

Nevertheless, there are several factors that indicate the outlook for the rupee may have changed. First, emerging markets are rising once again.

The MSCI Index for Asia is up 4 per cent this month to September 14. The MSCI India index is up 4.4 per cent, the Indonesian index up 8.4 per cent and the Korean index up 6.1 per cent.

This rise in the Asian stock markets has been mirrored in the rise of the Asian currencies, which have all appreciated against the dollar. It's early days yet, but if the trend continues, both the rupee and the stock markets may be firmer in the days ahead.

MNC pharma stocks

With the product patent regime coming into force from January 1, 2005, multinational companies are expected to have an edge over domestic players in the pharma market. That seems to be borne out by the behaviour of the MNC scrips, which have outperformed their domestic counterparts.

For example, since June 1 this year Novartis India has surged around 34.17 per cent, Pfizer has appreciated 25.7 per cent and Aventis Pharma has also risen 11 per cent. In contrast Wockhardt has risen merely around 6 per cent, Cipla has grown 10.5 per cent and Sun Pharmaceutical has declined around 2 per cent.

The argument is that once the new regime comes into force they plan to introduce products from their global portfolio and that appears to have helped MNC stocks outperform.

However, analysts opine that they do not see much logic in that argument, because, even in the new patent regime MNCs are expected to adopt a wait and watch attitude vis-a-vis product launches.

Pricing is expected to be a key factor "" no doubt the current price freeze agreed to by several companies is valid until March 2005, but it has sent a signal that the government is keen to ensure affordable medicines.

Also the viability of product launches here has to be carefully studied "" it doesn't follow that a drug successful in the US will do well here. So why have MNC stocks outperformed?

Analysts say that all that has happened is a rotation of investors' portfolio rather than a dramatic change in the fundamentals of MNC stocks.

Sugar industry rebuffed by apex court

The efforts of UP-based sugar companies to avoid paying state-advised cane prices (SAP) arrears to farmers have been rebuffed with the apex court recently refusing to admit a plea by private sugar mills to review its earlier decision.

The Supreme Court had earlier ruled that the UP government can announce a SAP every year and that mills must accordingly meet those requirements.

For sugar companies operating in that state like Balrampur Chini Mills, Dhampur Sugar and Oudh Sugar the implications from this decision are far reaching ""- analysts point out that it is expected to result in a Rs 700 crore outflow for the industry for meeting their obligations relating to FY03 and FY 04.

And this development has come at a time when there has been a sharp drop in sugar output in the country in the 2003-04 season (October-September).

As a result sugar scrips have been weak on the bourses with Dhampur Sugar declining around 10 per cent over the last 8 days and Balrampur Chini falling 5.5 per cent.

The ability of large players to leverage better pricing conditions has been limited with the government attempting to improve supply by permitting duty-free imports of raw sugar for domestic consumption, with obligation of exports after processing to be met only in two years.

And downward pressure on domestic sugar prices is expected to only grow with the Centre releasing 2 lakh tonne of sugar as additional quota for free sale in the domestic market for September.

Moreover, the issue whether a state government can demand SAP retrospectively is still pending with the Allahabad High court. And a negative decision on this case could increase the liabilities of sugar companies operating in that state by an additional several hundred crore.

With contributions from Amriteshwar Mathur