Rupee may rebound if crude keeps falling

The last fortnight was excellent for big stocks. The Nifty is very close to an all-time high and looks capable of going north but smaller stocks have continued to take a hammering

The rupee hit a new low on Friday before it recovered to some degree. That was driven by a plunge in the Yuan’s value, which dragged down most Asian currencies in “sympathy”. However, the stockmarket rose on Monday, driven by the revamping of GST over the weekend. Crude oil prices have also abated slightly, bringing some relief to India’s external account and we may see a rupee rebound if crude continues to trend down.

Since April, the RBI has expended over $21 billion from Reserves. Part of this was in direct defence of the currency. The rest of the drain came from meeting redemption requests from foreign portfolio investors, and due to the worsening Trade Balance.

If crude prices do continue to moderate, it will also reduce some fears of inflation. However, core inflation (inflation in non-food and fuel items) is soaring. consumer price inflation ran at 5 per cent for June, just a little higher than 4.87 per cent in May. But core inflation hit 6.4 per cent, the highest levels since mid-2014. 

The high core print could mean another hike from the RBI in its next policy review. This is more likely to happen if growth is doing well. The data is mixed on that front. The May Index of Industrial Production showed moderation at 3.2 per cent year-on-year growth. However the PMIs for June were pretty strong for both services and manufacturing.

Corporate results so far also seem to be pretty good with double digit revenue and profitability growth. However, these have to be taken with a pinch of salt because of base effects caused by GST and also due to the bias caused by TCS delivering excellent results in a very small sample. The GST itself has been revamped of course but state finance ministers seem to be unhappy. Estimates suggest that the cuts could result in revenue collection dropping by close to 1 per cent of GDP.

Essentially, TCS accounted for more than 20 per cent of both total profits and revenue growth. Infy and Wipro produced less inspiring results so the IT sector as such, isn’t seeing a rebound.  Another Tata company, the unlisted Tata Teleservices Limited (TTSL) has reported the biggest-ever loss in India's corporate history at Rs 274.7 billion for 2017-18. It transferred its wireless services business for free to Bharti Airtel and the losses have arisen due to write-offs. The group has ensured that all TTSL debts have been paid with Tata Sons taking an overseas loan of $1.5 billion to meet outstanding debts.  The TTSL debacle tops losses reported by telecom services rival Reliance Communications, which had a loss of Rs 239 billion.

The hyper-competitive nature of the telecom services business has made it difficult for companies in this space to survive. After the advent of Jio, call and data charges have dropped due to the price war, reducing revenues and leading to losses for most telecom service providers. The Idea-Vodafone deal is now being held up, with last mile issues on payments due.

The initial public offering of HDFC Asset Management Company (AMC) is due to launch on July 25. The AMC is the second-largest mutual fund house, with assets under management of Rs 3 trillion, and net profits of Rs 7.22 billion in 2017-18.  The AMC is aiming to raise Rs 28 billion with the sale of 25.4 million shares (about 12 per cent of the paid-up capital), priced in the band of Rs 1,095 to Rs 1,100 per share. Bids can be made for a minimum lot of 13 equity shares and in multiples of 13 shares, with a maximum bid of Rs 2 lakh in the retail category. This will be the 5th listing within the HDFC group. The issue is likely to be popular, given the success of the “Mutual Fund Sahi Hai” message. The market valuation would be above Rs 230 billion, which would be about 8 per cent of AUM, if that’s a relevant ratio.

The government has decided to withdraw the Financial Resolution and Deposit Insurance Bill, which was due to be placed before Parliament. The FRDI draft caused a lot of controversy due to the “bail-in” clause, which indicated that depositors' funds might, under some circumstances, be used to bail out loss-making banks. Since many government-owned banks are loss-making, there were fears that these clauses might be invoked to rescue the PSBs. But the Bill could well have been placed before Parliament with that one contentious clause reworked, perhaps with a sharp hike in the limit of deposit insurance from the current Rs 100,000/ depositor.  The wholesale withdrawal of the Bill leaves an open question about the outcomes in possible cases of bank failure.  

Technically speaking, the last fortnight was excellent for big stocks. The Nifty is very close to an all-time high and looks capable of going north. However, smaller stocks have continued to take a hammering. This sort of narrowing of market sentiment usually occurs close to market tops. 

Apart from corporate results, domestic politics and geo-politics could both play a part in influencing market sentiment over the next two weeks. We’re guaranteed more fireworks during the ongoing Monsoon Session and Brexit is looking utterly chaotic at the moment.