After a tepid start, the Nifty cracked by 150 points and the Sensex lost over 550 points on Wednesday.The sharp fall in the markets was led by auto, private banking and IT stocks. While auto stocks were spooked by the weak monthly numbers, IT stocks took a hit after TCS doubled salaries for trainees at the entry level. That was a clear indication of rising costs and thinner margins for IT companies. Vulnerable banks like ICICI Bank and Axis Bank came under pressure in trading. The overhang of the RBI policy on Friday also hangs over the markets and a 25 bps rate hike is now being factored in.
The IL&FS had a fairly mixed day after the old board was summarily suspended by the government. IL&FS board will meet on Thursday to chalk out turnaround plan. On Wednesday most IL&FS stocks were in upper circuit even as the Serious Frauds Investigation Office (SFIO) initiated a probe into IL&FS group and its myriad subsidiaries. While the Board will be steered by Uday Kotak, it also has other respected names like G N Bajpai, Vineet Nayyar, G C Chaturvedi and Malini Shankar. The Thursday meet will discuss the turnaround strategy and it will report the action plan in next 15 days.
After a higher MSP for Kharif crops, it is now the turn of the Rabi crops to get a boost. A day after farmer’s stir, MSP on Rabi crops also raised by government by 4-6%) for key winter crops like wheat, chickpeas, lentils and mustard. The government wanted to avoid a confrontation with the farmers lobby of North India ahead of crucial elections. Government estimates that the higher MSP on Kharif and Rabi crops will increase farmer’s income by Rs.62,600 crore this year. Of course, the impact of higher MSP on Kharif farmers is yet to be seen and should be visible soon in farmer incomes.
In a bid to hit two birds with one stone, the RBI allowed oil firms hit by rising costs to raise up to $10 billion overseas via ECBs and FCCBs. This facility will be made available to oil marketing companies like HPCL, IOCL and BPCL that have been hit by higher crude prices. This means that the individual borrowing limit of $750 million stands scrapped. This will not only address the funding concerns of oil companies, but also lead to an influx of dollars into India which will be instrumental in defending the rupee. India badly needs dollar flows at a time when FPI and FDI flows are turning tepid.
The ghost of the strong dollar came back to spook the Indian money and currency markets. The INR weakened 59 bps to 73.341/$ while 10-year bond yields hardened to 8.11%. This was after the bond yields had briefly shown some promise last week by dipping below the 8% mark. Both the currency and bond markets came under pressure on the back of higher crude prices and a spurt in demand for hedging dollar exposures. The higher crude price is likely to expand the trade deficit and take the CAD closer to the 3% mark. Bond yields were up on RBI rate hike expectations and a weaker than expected OMO support. It is also widely anticipated that the RBI may be constrained to hike the repo rates by 25 basis points in its October meet to quell inflation and prevent any risk-off flows.
It was a classic case of Mayawati back to her typical unpredictable best. BSP will now go it alone in Rajasthan and Madhya Pradesh assembly elections. In what could be good news for the ruling BJP government, the Bahujan Samaj Party led by Mayawati has decided to go it alone in the states of Rajasthan and MP. This throws cold water on the hopes of a Mahagathbandhan by the opposition parties. The fact that Mayawati was clearly cosying towards the BJP will be music to the markets and for the economy watchers. The impact on markets is likely to be positive.
