Markets rally after surprise early rate cut

Indian bonds, rupee and stocks gained on Wednesday after the Reserve Bank of India (RBI) surprised investors with a 25 basis points rate cut before markets opened and left open the prospect of additional monetary easing over the year ahead.

Although markets had been widely pricing in a RBI rate cut, most investors had expected the central bank to move either at its policy review on Feb. 3 or sometime after the government unveiled its annual budget at the end of February.

Instead traders were caught off guard, as the RBI cut its repo interest rate by 25 basis points to 7.75 percent, citing easing inflation and government efforts to contain the fiscal deficit.

"The statement was dovish in our view and with the disinflationary trend being strong, we see room for a further rally in bonds, in line with our economists forecast of more repo rate cuts," strategists at Barclays wrote in a note.

"We revise our 10 year government bond year-end target lower to 7.25 percent from 7.40 percent previously and continue to recommend being overweight duration in government bonds."

The rate cut pushed the benchmark 10-year bond yield to 7.65 percent, down 12 basis points on the day and its lowest level since July 15, 2013.

Meanwhile, in the overnight indexed swap market, the one-year rate dropped as much as 13 bps to 7.50 percent, its lowest since July 15, 2013, which traders said priced in the prospect of cuts of around a further 75 bps over the next year.

"In OIS - we think the flattening trend has most likely come to an end. The curve will steepen. The pace of steepening will be dependent on how aggressive RBI is," said Kumar Rachapudi, a fixed income strategist with ANZ Bank in Singapore.

Stocks rallied with the Nifty gaining more than 2 percent in early trade, while the rupee partially convertible rupee gained to as much as 61.71, its strongest level since Nov. 24.

The NSE Bank index rose as much as 4.3 percent to a record high of 19,410.40 points.

Weekahead - Markets seen rangebound ahead of CPI, industrial output data

Indian debt/FX markets to wait for cues from CPI, industrial production data next week.

U.S. nonfarm payrolls data to provide cues for market's opening on Monday.

10-year bond seen in 7.88 to 7.98 pct range next week.

Rupee seen holding between 61.30 to 62.00 per dollar band.

Winter session of parliament and government's disinvestment programme for FY15 also to be in focus.

Nifty seen in 8,400-8,700 range.

Foreign investor activity in index futures also on watch after four consecutive sessions of selling.

China CPI data on Wednesday.

KEY FACTORS TO WATCH

July-Sept current acc balance, no fixed date for release.

Wed: India money supply data.

Fri: India bank credit data, deposit data at 1130 GMT.

India CPI/industrial production data at 1200 GMT.

RBI opens the door for a rate cut early 2015: CRISIL

Reserve Bank of India (RBI) has held the repo rate steady at 8% as expected. CRISIL expects inflation to average at 6.7% in FY15 and the RBI to cut rates by April 2015.

In today’s rather dovish monetary policy statement, RBI indicated that a change in its monetary policy stance is premature at this juncture. However, if the fall in inflation is sustained, inflationary expectations remain contained and fiscal developments are encouraging then a change in monetary policy stance is likely early next year. The RBI kept its central estimate for growth at 5.5% while revising its inflation projection down to 6% by March-end FY15.

In the medium term, RBI expects inflation to hover around 6% assuming a normal south-west monsoon, lower crude oil prices and no change in administered prices barring electricity. RBI governor also mentioned that the RBI is in the process of finalizing the monetary policy framework, and the government seems comfortable with adopting a target of around 4% with a band of +/-2% beyond 2016. 

The liquidity in the banking sector has improved and currently the reverse repo rate of 7% is effectively the short-term effective rate to which other short-term market rates are linked. The yield on 10-year g-sec has also been easing in recent months – due to higher liquidity, falling inflation and lower pressure on government borrowings with declining oil prices. However, even as deposit rates and short term rates are starting to decline, lending rates will be slow in coming down.

Sept quarter disappoints for India Inc

Economic indicators may be beginning to look up, but corporate earnings are faltering. The July-September period has been lacklustre for corporate India with sales growing a modest 3.2 per cent over the previous year, and profits from operations expanding by a mere 8 per cent.

In the June quarter, operating profits had grown 23 per cent year-on-year and revenues by10 per cent.

Though companies reported a 29 per cent increase in net profits for the September 2014 quarter, it was thanks largely to a leg-up from ‘other income’ from an asset sale or an investment income. This is almost similar to the 31 per cent net profit increase in the June 2014 quarter.

These numbers are from the 3,347-listed companies which have declared results for the earnings season, excluding banks, financial institutions and oil marketing companies.

Slowing down

Sales growth has steadily lost pace, spiralling down from 11 per cent in the March quarter, to 10 per cent for the June and to 3.2 per cent now. Many core sectors saw a sharp drop, indicating that all is not well with the investment cycle.

For instance, power companies, with their litany of woes, clocked sales growth of 7 per cent in the September quarter, well below the 12-13 per cent in June and March.

Sales growth for steel companies also came in at a low 5 per cent in the September 2014 quarter, as weak prices on abundant supply capped realisations. Bigwigs such as SAIL, Tata Steel, and JSW Steel have all slowed down.

Power equipment and capital goods, telecom, and fertilisers are the other sectors where sales growth is losing steam.

And while raw material costs did fall, it did not materially bolster profits for all.

Costs of inputs such as coal, base metals, and crude oil have been drifting lower, but other cost heads such as staff did the opposite.

The impact of raw material savings on profits may, however, be felt in the coming quarters.

Large versus small

The fall in sales growth was steeper for large companies in the September quarter compared to mid-and-small companies, given the slowdown reported by players such as Bharti Airtel, Tata Motors, SAIL, Tata Steel, NTPC, and Power Grid.

The BSE 100 companies saw sales growing 4.3 per cent in the September quarter over the year ago period, decelerating from the 14 per cent in the June and March quarters. Companies making up the mid-and-small cap indices on the BSE have seen sales growth stagnate at 5-7 per cent in the past three quarters.

But large companies have trumped the smaller ones on profitability, suggesting that they were benefiting from economies of scale in procurement. Their input costs shrank in the September 2014 quarter.

Net profit margins for large companies have held at a reasonable 10 per cent for the past three quarters. These margins for smaller companies, on the other hand, are far below at 2-3 per cent. There were also more loss-making companies in the September quarter than in the previous ones.

Bucking the trend

A few sectors that bucked this trend, reporting improving sales and profit growth, include brokerage companies, auto ancillaries and cement. Brokerages benefited from booming stock trading volumes and auto ancillaries from strong replacement demand besides better commercial vehicles, two-wheeler and car sales.

Industrial output growth picks up in Sept to 2.5 pct y/y

 India's economic outlook brightened on Wednesday with a surprise pickup in industrial output and further cooling in consumer prices, data showed, boosting Prime Minister Narendra Modi's bid to end the longest slowdown in growth in decades.

Retail inflation, which the Reserve Bank of India (RBI) tracks in setting lending rates, slowed to 5.52 percent in October from a multi-year low of 6.46 percent a month earlier, helped by slower annual rises in food and fuel prices.

Industrial output unexpectedly grew 2.5 percent year on year in September, its fastest pace in three months, helped by a rebound in the capital goods sector, separate government data showed.

Wednesday's data is expected to bolster the outlook for Asia's third-largest economy which is recovering weakly from a two-year spell of sub-5 percent growth.

Economic growth hit a 2-1/2 year-high of 5.7 percent in the quarter to June, prompting some economists to predict 6 percent growth for the fiscal year to March 2015, higher than 5.5 percent projected by the central bank.

But lacklustre industrial production since then has led some to trim their more optimistic projections.

Cooling prices will intensify pressure on the RBI to cut interest rates to stimulate consumer demand which powers 60 percent of the economy.

"A rate cut at this juncture will no doubt add to the existing positive growth impulses," said Prithviraj Srinivas, an economist with HSBC.

"But such a move would also increase the risk that the RBI misses its inflation target ... to return inflation back to the level last seen in the period between 1999 and 2005, when CPI inflation averaged just 4 percent."

Worries that price pressures would revive once food prices pick up due to a weak monsoon and the fading of base effects led the RBI to leave one of Asia's highest lending rates on hold for a fourth straight meeting in September.

It is widely expected to maintain the status quo when it reviews monetary policy on Dec. 2.

Slowing inflation, however, has bolstered hopes for a rate cut next year, triggering a rally in the bonds market.

Retail inflation cools further to 5.52 percent in October

India's annual consumer price inflation eased for a third straight month in October to 5.52 percent, its lowest level since the government started releasing the data in 2012, data showed on Wednesday.

The latest number was lower than a Reuters poll forecast of 5.80 percent and September's 6.46 percent print.

Consumer food price inflation, under a new series published by the government, eased to 5.59 percent last month from 7.67 percent in September.

India's trade deficit widens to $14.25 billion in September

 India's trade deficit widened to $14.25 billion in September following a jump in oil and gold imports, government data showed on Tuesday.

The deficit stood at $10.84 billion in August.

Merchandise imports surged nearly 26 percent last month year-on-year to $43.2 billion. Exports, meanwhile, grew a tepid 2.73 percent on year to $28.9 billion.

Gold imports in the month under review increased manifold to $ 3.75 billion compared to $682.5 million in same month last year.