Midnight News Update – Jan 04th 2017
Infosys was the big casualty on Tuesday as the stock took a hit from a fairly scary outlook given by Vishal Sikka for the coming year. The stock was down 2% after Vishal Sikka cautioned that the road ahead could be extremely difficult. This was part of his New Year email address to the employees of Infosys. Sikka cautioned that The big challenge for IT is weaker IT spending by global companies in the coming year, something Gartner has already cautioned about. Additionally, the only viable route for IT companies seems to be focusing on automation and that could have negative repercussions for employee morale over the medium to long run.
Mergers & Acquisitions (M&A) activity in India in 2016 touched an all time high of $72.4 billion overstepping even the record set in the year 2007. This pertains to M&A involving Indian companies. In 2007, India had clocked M&A deals of $67 billion which was an annual record till date. Energy and power accounted for 30% of all M&A activity in the year. Global M&A activity was more than 40% which is also an all-time record. The M&A activity recorded a sharp growth over the previous year. However, PE backed M&A deals actually fell by 38% on YOY basis in 2016. Financial services accounted for 26% of all M&A deals followed by High tech at 19.5% and industrials at 11.5%.
As banks competed with each to cut their MCLR, bond yields in the Indian bond markets touched a 1 month low. It was a curious case of the MCLR driving the yields rather than the other way round. The MCLR cut war was started off by SBI after it decided to cut MCLR by 90 bps in 1 shot forcing a lot of PSU and private banks to follow suit. This was necessitated more out of desperation. After the demonetization exercise, banks are flush with deposits and a weak credit situation is adding to their margin problems. The 10-year benchmark yields fell by 6 basis points to 6.34%. Yields had hardened in December after the RBI had opted to keep status quo on repo rates fearing that the Fed rate hike may compress the yield differential and lead to deluge of capital flows out of India.
The rupee hit a 1-month low at 68.33/$ as there was heavy demand for the US Greenback from banks and importers. The INR lost almost 11 paisa in a single day. Already, large banks like Deutsche Bank are expecting INR to weaken to beyond 72.5/$ during the current calendar year as the hawkish tone of the Fed is likely to make the dollar consistently stronger. The dollar index is already quoting at a 14-year high and strengthening by the day. The dollar index is already quoting at 103.5 and looks set to move much higher. Ironically, the INR did not weaken during the entire $20 billion repayment of the FCNR deposits raised in 2013, but the Fed hawkishness seems to have done the trick. With the US economy getting stronger and Trump talking about tax cuts and infrastructure spending, the dollar looks set to strengthen further. FII outflows have also played their part in the rupee weakening.
In the first 8 months of the current fiscal ending November 2016, the government has reportedly raised Rs.21,432 crore via disinvestment of central public sector enterprises (CPSE). That is nearly 60% of the full year target for disinvestment. This year, the government seems to be in a much better position compared to the previous year. In addition, the government raised another Rs.2000 crore through the sale of stake in SUUTI shares. The big challenge for the government will be meeting the challenge of strategic sale. In the previous financial year, the government fell woefully short on this front.
The Enforcement Directorate (ED) has found something amiss in the gold import numbers in November. The ED believes that a lot of black money may have been converted into gold as demonetization would have made banking all this black money quite dangerous. Gold imports showed a sharp rise in the month of November stood at 66,000 kg, predominantly from the large cities like Mumbai, Delhi, Hyderabad, Ahmadabad and Kolkata. Recently, the ED had also arrested officials of Axis Bank for helping some customers convert their demonetized currency note into gold to escape the normal audit trail.
