Nifty again weakens marginally ahead of the possible Fed rate hike

Nifty again weakens marginally ahead of the possible Fed rate hike, which eventually resulted in the Fed hiking rates by 25 bps. On a volatile day, the Nifty did show some strength. However, it lost value in the last hour as autos and banks came under pressure. The advance / decline ratio was almost even at 1:1. While banks did see some pressure in the second half, NBFCs continue to face a crisis of confidence in the light of the IL&FS fiasco. INR strengthens marginally to 72.616/$ while 10-year bond yields fell to 8.07%. The bond markets appear to have already factored in a 25 bps rate hike by the Fed.

The problems at Jet Airways appear to be back. Liquidity issues escalate at Jet Airways as pilot salaries get deferred. Pilots make up for 10% of the total staff of Jet Airways but account for more than 50% of its monthly salary bill. Pilots will only get 75% of the August salary and the balance 25% will be deferred; a clear indication of the liquidity crunch at the airline. In the last fiscal, Jet Airways had a total salary bill of Rs.3100 crore and its condition is worsened by higher ATF prices and competitive pressures. Higher crude prices at around $81/bbl will only aggravate matters further.

India has raised import tariffs on 19 “non essential” items to stem the rupee fall. The government will be imposing higher tariffs on a range of products effective from Thursday. Higher tariffs will apply on products like refrigerators, ACs, footwear, speakers, luggage items and aviation turbine fuel. The higher tariff on ATF is not great news for aviation companies. This appears to be a direct effort to stem the rupee fall and also to control the spirally CAD. Most of the items of tariff are what the government classifies as non-essential, but the inflationary impact cannot be overlooked.

Fed hiked rates by 25 basis points in its 26th September meeting. Global markets had already factored in 25 basis rate hike by the US Federal Reserve. With strong GDP growth, higher inflation and low levels of unemployment, the US Fed is all set to hike the rates in its 26th September Fed meet. The CME Fed Tool was already assigning a probability of 95% for a 25 bps rate hike. The greater matter of interest will be whether the US Fed gives up on its accommodative policy, which appears to be the case from the text of the meeting. That could have larger repercussions on global liquidity.

Reuters’ poll of economists veers towards RBI rate hike in October. With the US Fed hiking rates by 25 bps on 26th September, the RBI may not have much of a choice other than to hike repo rates for the 3rd time in 4 months. The rate hike will not only help stem the weakness in the rupee but will also act as a counterweight to the rising inflation. With Brent crude at $81/bbl and higher MSP, inflation is expected to harden in the coming months. RBI rate hike at this point will have multiple repercussions at this point of time. Firstly, it is likely to increase the bond yields and that will be negative for bond prices. Secondly, this will mean further losses on the bond portfolios of banks and mutual funds. Lastly, higher bond rates will also imply that Indian companies will be borrowing at much higher yields.

There was some sweet relief for the sugar sector. Cabinet cleared an Rs.5500 crore package for the sugar industry. This is the third incentive package for sugar sector within a span of 4 months. This package will include doubling of production aid to cane farmers, transport subsidy to sugar mills for exports and special export incentives to reduce the supply of sugar domestically. The last year produced 35.5 million tonnes of sugar leading to a glut of supply and lower prices. This move will help to marginally reduce the impact of the sugar glut in the economy.

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