Analysts are expecting that PSU banks and NBFCs results could take a hit due to major write-offs in the June quarter. Allahabad Bank became the second bank to report a major fraud by Bhushan Power and Steel worth Rs.1700 crore after PNB had recently reported a similar fraud by Bhushan Power for twice the amount. Meanwhile NBFCs are also likely to take provisions on their impaired portfolios. Analysts expect the quarter to come under pressure for the financial sector as a whole. Companies like Dewan Housing have already reported deep cuts in profits in the March quarter and could continue in June.
The safeguard duties of 25% imposed in the budget on steel imports has come in for objection from steel users. Major steel consumer bodies in India have opposed the higher import levy on steel. In fact, large steel consumers highlighted that the 25% safeguard duty on imported steel could sharply spike their cost of production in India. The contention was that imported steel accounted for just 4.5% of total steel consumption and were of grades and quality not available domestically. The engineering goods companies warned that higher steel prices due to the duties could hit exports further.
Oil supply could remain constrained in the next few days as nearly 70% of Gulf of Mexico oil production is currently facing shutdown. Even as the Tropical Storm Barry weakened in the Gulf of Mexico and moved on to the Louisiana coast, nearly 2/3rd of Gulf of Mexico oil companies kept their facilities shut to avoid flooding at the plant. In the previous week, the price of Brent Crude had moved closer to $67/bbl as the storm threatened to disrupt the global oil supply. The geopolitical tensions in the Middle East and West Asia have also kept the oil market on tenterhooks.
After Dr. Raghuram Rajan and Dr. Manmohan Singh, we have another critic of sovereign bonds in the form of Montek Singh Ahluwalia. The former Planning Commission chief, Montek Singh, was of the view that the government’s proposal to raise Rs.70,000 crore via sovereign bonds may raise the spectre of currency risk. He warned that this could become a major challenge if the dollar were to appreciate sharply. Even Dr. Raghuram Rajan had expressed his preference for raising domestic funds and contended that relying on sovereign dollar bonds carried an unaffordable currency risk.
The impact of wealth destruction was quite acute in the markets last week. In fact, nine out of ten companies on the Nifty lost Rs.88,600 crore in market value. The post budget impact was pronounced through the week as the buyback tax, public shareholding and the higher surcharge on FPIs had a negative impact. High value stocks like HDFC and TCS saw the maximum erosion in market value. Meanwhile, FPIs continued to be net sellers in equity, although they more than compensated in the form of debt inflows. In the first two weeks of July, foreign portfolio investors (FPIs) withdrew a net sum of Rs.4,954 crore from the equity market but infused Rs.8,505 crore into debt on the back of higher real yields and stable currency. This resulted in net inflows of Rs.3,551 crore overall.
The US Federal Reserve may be bracing for a rate cut according to a Bloomberg Report. According to the report, the global markets may be bracing for a 25 bps rate cut by the US Fed when it meets on July 31st. In his recent testimony, Jerome Powell spoke at length about the growth and inflation challenges for the US almost hinting at a rate cut. The CME FEDWATCH tool has assigned a probability of 77.5% to a 25 bps rate cut in July and 22.5% for a 50 bps rate cut. That virtually boils down to a 100% probability of a rate cut based on the discount factored by the Fed futures trades.
