 "<b>Devangshu Datta:</b> Policy triggers and wild cards")
In the broadest sense, changes in labour laws and incentives are required to induce the movement of labour from agriculture into manufacturing and services. That is a long-term process and no government has really enabled it.
Right now, agriculture remains heavily weather-dependent and the monsoon has been deficient this year. The last fortnight has seen decent rain across much of the country, reducing the shortfall to some extent. But there are still chances of lower rural consumption and also of food inflation this fiscal, even if rain deficiency is unlikely to be as drastic as was feared when the monsoon was running at 43 per cent below normal two or three weeks ago.
Inflation dropped to 7.31 per cent month-on-month in terms of the Consumer Price Index (CPI) for June 2014, versus June 2013. It also dropped to 5.4 per cent month-on-month for the Wholesale Price Index. Those are encouraging numbers. The CPI is below the Reserve Bank of India (RBI)'s targeted eight per cent (for January 2015) at the moment. If the monsoon doesn't misbehave from now on, the "glide path for inflation", as Raghuram Rajan calls it, will be along the lines the RBI chief is hoping for.
Despite the lower inflation numbers for June, most observers think the RBI will maintain status quo in the next policy review in August. The dangers of higher food inflation, and also of a possible spike in global crude, could mean the RBI adopts a wait-and-watch policy. Some analysts don't expect a policy rate cut until January 2015.
Setting a seven-year time frame as the RBI did for such loans is a sign of some uneasiness. This proposal is a big bet by the government that it will be able to turn the infrastructure sector around and bring multiple stalled projects back on track. Banks already have massive non-performing exposures in infra. Non-CRR, non-SLR, non-priority loans to infra sectors could mean throwing good money after bad. There are inherent tenure mismatches with bank lending anyhow. Most bank funding comes from one- to three-year time deposits, while the average tenure of an infra loan is much more.
Results in the first quarter of 2014-15 do suggest that conditions are improving. Just about 12 companies in the Nifty have come up with results so far. The information technology majors, TCS and Infosys have done well, but the market was disappointed with Wipro's results. Private banks such as Axis, HDFC Bank and IndusInd Bank have all delivered reasonable results. Bajaj Auto is still struggling and so is UltraTech Cement.
Reliance has crossed the $1-billion level in terms of profits and it beat consensus estimates. However, the key here is decisions on gas pricing and that's not happening before September 30. The entire fuel subsidy situation has turned into a guessing game for investors. The hopes of a full-on, big-bang decontrol have obviously been belied but there are still hopes of a sensible alignment to market prices.
So far, global crude prices have not gone haywire despite war in West Asia. If crude prices spike, and there's a very good chance that this will happen, the government will be faced with a very nasty situation. Either it allows the fiscal deficit and the trade gap to balloon. Or it prices fuels at closer to market and takes both the ensuing political hit and deals with inflation.
The market is still absorbing the implications of the Budget. There's been some clarification on the tax front. The fixed income mutual fund segment could take a real hammering due to the change in capital gains treatment. There will be re-allocations of a fair chunk of the Rs 7,00,000-crore corpus managed in these schemes. Will some of that money come to equity? Or will it go to bank fixed deposits?
Foreign institutional investors remain heavy net buyers and the domestic investors remain cautious net sellers. The net institutional attitude is still strongly positive. Retail booked some profits after the Budget and appears to be a little more pessimistic than it was when this government took charge.
The market went through wild gyrations in the past 12 sessions. It dropped post Budget, from Nifty 7,800 levels to around Nifty 7,425 and then it rose again to a new all-time high of 7,840. That was a 4.5 per cent correction followed by a bull run of 5.5 per cent. That 10 per cent swing in 12 sessions reflects movements in big stocks, which are backed by institutions. Smaller stocks, backed by retail, have seen less dramatic swings, and more in the way of net losses.
The RBI's policy review could be the next normal policy trigger. News-based factors could prove to be wild cards. Developments in West Asia and on the weather front may create trading opportunities. So could the Comptroller and Auditor General's report that alleges undue favours granted by the Gujarat government to Adani, Essar and Reliance.