The RBI has asked banks to peg small and retail loans like home loans and auto loans to external benchmarks. In line with the commitments made by the government, the RBI instructed all banks to start benchmarking their home loans and auto loans to an external benchmark effective October 01st. That is like moving from an RPLR based pricing to an MCLR based pricing. Pegging to an external benchmark like repo rate will ensure smooth and easy transmission of rate cuts by the RBI. This has consistently been one of the areas where the RBI has been disappointed with the banks.
After a battering on Tuesday, the stock market indices recovered on Wednesday despite starting weak. However, the Sensex recovers was capped by automobile stocks. Sensex and Nifty recovered from lower levels on Wednesday as banks and metal stocks helped the markets higher. While banks saw short covering, metal stocks bounced on the back of positive growth data from China. However, auto stocks remained under pressure after the truck and HMCV sales fell by more than 60% on a MOM basis. The A/D ratio was encouraging at 30:20 for Nifty and the VIX also trended lower during the day.
Services PMI falls to 52.4 for August, in line with other high frequency growth indicators. Services PMI at 52.4 continued to be under pressure compared to 53.8 in July; losing momentum on a sequential basis. This comes in the aftermath of PMI Manufacturing also at a 15-month low of 51.2. Earlier, the GDP growth for June quarter at 5% and core sector at 2.1% had also disappointed. While a figure of PMI above 50 still represents expansion, the momentum of growth is surely slowing down. There was a general slackening of fresh recruitments and fresh order flows in the services sector.
FII selling has continued unabated despite the positive efforts of the Finance Minister towards the end of last week. Foreign Investors sold $550 million in equities in first two days this week. The FPI surcharge withdrawal appeared to have made little impact on the sentiments of foreign investors as they sold close to $550 million in equities in just 2 days. This selling was largely led by a risk-off shift by FPIs in the midst of the global uncertainty surrounding BREXIT and the trade war. The sharp fall in GDP growth to 5% and tax concerns look to have impacted FPI sentiments for now as FPIs are selling out.
Even as the trade situation saw hope, it became clear that the US was not really benefiting from the trade war. Trump agreed to keep Huawei out of trade talks. It was not clear whether it was a refusal to compromise on Huawei or flexibility to talk trade without discussing security concerns over Huawei. Markets interpreted the statement as a positive sign of flexibility. Meanwhile, US trade deficit shrank, but China situation did not change much. In the midst of the escalating trade war, the US Commerce Department announced the trade data for July 2019. Overall trade deficit for the month of July 2019 fell by 2.7% to $54 billion. However, the principal target of the tariff war, China, increased its advantage with the US trade deficit with China increasing by 9.2% to $32.8 billion.
Global oil major, British Petroleum, has warned that oil Demand growth could slow to below 1 million bpd in 2019. Senior officials of British Petroleum are worried that the global slowdown that has been triggered off by the face-off between the US and China. BP expects it could reduce the overall demand for oil. Brent prices have been under pressure and have been quoting under $60 on the back of the trade war escalating. The demand supply gap is a key determinant of oil prices in international markets and that gap has been increasingly weighing towards the supply side putting pressure on oil prices.
