Markets Crack
Is it temporary, or is there a deeper market issue?
The Nifty and the Sensex lost close to 3.5% during the week. The real matter of worry was that on each of these days there was absolute lack of buying support at lower levels. Of course, there have been concerns over valuations for quite some time and at the level of 10,000, the Nifty was bound to show some profit taking. But the real worry is whether this is an indication of larger things to come.
There are geopolitical issues…
The big worry is that there are serious geopolitical issues on Indian borders and elsewhere in Asia. Trouble has been simmering in Asia and Middle East for quite some time now; it is just that it has worsened. The Doklam stand-off near Sikkim has escalated with constant calls to war by the Chinese media. North Korea continues to persist with its nuclear program and now even threatens key US installations. The problems in Syria and Iraq are far from over.
It is this continued atmosphere of uncertainty that is actually spooking the market. It is hard to say how much of truth there is in any of these events but markets automatically get cautious at such elevated levels. Both Doklam and North Korea are events that have the potential to deteriorate quite rapidly. Both have the potential to get major player like Russia, China and the US involved in an internecine war. That is exactly the worry. Indian economy can ill-afford a prolonged stand-off!
Two Wheelers
Is Bajaj Auto losing out on the domestic game?
When Bajaj Auto announced its global tie-up with Triumph International of UK, it was not just a strategic link-up. It was also a tacit admission by the company that it was rapidly losing its market share in the domestic market. The Triumph deal will enable Bajaj to manufacture Triumph motorcycles in India using its low-cost skills. It will also ensure Bajaj’s presence in the entry level, mid-level and the premium segment of two-wheelers. But there is a bigger story behind this…
Dropping to Number 4…
When the recent monthly numbers for two wheelers were announced, Bajaj was clearly in the fourth position in terms of domestic sales. To be fair, Bajaj derives nearly 50% of its revenues from the export market and only 50% comes from the domestic market. Still it is hard to fathom that Bajaj has fallen behind Hero Moto, Honda and TVS Motors in terms of domestic sales. This was unimaginable even 20 years ago. When Hero Honda overtook Bajaj couple of decades ago, Bajaj was still a prominent second. With the split between Hero and Honda, Bajaj had been relegated to 3rd place and has now ceded the third spot also to TVS Motors. Probably, Bajaj continued its focus on scooters for too long and also did not get its motorcycle positioning too granular. The Triumph deal is Bajaj Auto’s attempt to reverse the pecking order in the two-wheeler segment.
Rupee weakens
Why this could be a blessing in disguise for India…
Back in December 2016, the INR had corrected to around Rs.68.5/$. At that point of time, most analysts were expecting a level of Rs.72/$, which would have been reasonable from an REER point of view. However, as the US Fed became more dovish and the impact of demonetization was quite tepid, the INR appreciated all the way to Rs.63.5/$. In the last one week, the INR has slightly weakened to the 64.5/$ mark. While this may be a small shift, it could still be positive for markets. Let us understand why…
The propensity to import…
What a strong rupee has done in the last few months is to open the gates to greater imports. Over the last 8 years, India’s imports from China have gone up 3-fold. This is largely due to rupee strength. A strong rupee makes imports cheaper and domestic demand finds imports more economical than domestic output. We have seen industries like steel, machinery and radial tires being negatively impacted by dumping from countries like China. While the government has imposed countervailing duties on select products, the answer would be to let the rupee weaken as it will automatically discourage imports. India’s monthly trade deficit has touched $13 billion on an average and the forex reserves may be just about sufficient to cover 10 months of exports. The answer to the rising trade deficit is to shrink imports with a weaker rupee!
Helping the exporters…
Across the world, many nations have followed a weak currency approach to boost exports. Countries like South Korea, Japan, Taiwan and later China also adopted a cheap currency policy. A weaker rupee will not only shrink imports but also provide a boost to exports. A weak rupee makes Indian exports cheaper for foreign consumers and hence gives a boost to exports. We have seen India’s merchandise exports and services exports remain stagnant for over a year now, despite a pick-up in world trade. This situation can be largely reversed through a weaker rupee! In fact, there have been no big export stories in the last 20 years after software and pharmaceuticals!
