In one of its most frenetic rallies, the Dow Jones index surged by more than 1085 points or 4.98% in a single day on Wednesday as economic data came in stronger than expected. Analysts are of the view that the markets were already substantially oversold and hence the correction was largely technical. This almost reverses 50% of the correction in the previous 6 days. Oil stocks led the surge as the price of Brent Crude moved up by nearly 6% in a single day. The positive sentiments in the US market are likely to rub off across Asia and Europe on Thursday.
Former RBI governor, Dr. Bimal Jalan, will lead a 6-member panel to look into the highly sensitive aspect of reserve transfer to the government. The RBI currently runs a contingency reserve and a gold/currency revaluation reserve. While the revaluation reserve cannot be used unless the gains are realized, the contingency reserve is created out of contributions by the RBI each year. The Contingency reserve has nearly Rs.2.8 trillion and that is what the government wants transferred to them. The Jalan committee will take a final view on the subject. It was one of the reasons that led to the exit of Dr. Patel.
A day after the National Anti Profiteering Authority (NAPA) decided to impose a penalty of Rs.223 crore for not passing on lower GST rates to customers; the company has decided to drag NAPA to the court to law. This is the first instance wherein a consumer goods company has dragged the NAPA to court over one of its anti profiteering orders. Under the GST Act, any reduction in the GST rates has to be immediately and entirely passed on to the consumers. However, this has been a bone of contention since in a consumer set up, determining the actual cost is quite a complicated affair.
After getting perilously close to the 3% mark, the government has now pegged a lower current account deficit (CAD) for the year 2019 at just 2%. This is likely to be largely led by lower prices of crude oil. Back in October, the price of Brent Crude had touched a high of $86/bbl which has since corrected to below $55/bbl. Since India imports 80% of its crude requirement on a daily basis, its trade deficit and CAD has been traditionally very sensitive to the price of crude oil. A lower CAD will put less pressure on the value of the rupee and also ensure that there are now worries on the credit rating front.
One of the big stories that are expected to unravel in the next few weeks is a series of likely defaults by Asian companies. Over the last 1 year, many Asian economies have seen their currency depreciate by nearly 40-50% against the US dollar and even liquidity has gotten tighter. These currencies are likely to experience the most defaults. For example, in China the government has made a conscious effort to force companies to deleverage while in India there has been a liquidity crunch after the IL&FS default. This has led to pain, although the Indian rupee is not as weak as other Asian currencies in South East Asia which are largely export dependent. The worry is more on the front of companies with dollar borrowings which could face enhanced dollar payouts after the currency fall.
The divergence in returns between the US markets and the Indian market has been one of the major factors impacting the market conditions. Currently, this divergence is the highest in five years since the US markets have corrected sharply but the Indian markets are still holding forth. Since the middle of November, the Dow has fallen nearly 10% but the Nifty is up by 4% leaving an overall return gap of nearly 15% between the US and India. Traditionally, such a huge divergence has either led to a sharp correction in the Nifty or a sharp surge in the US indices. That remains to be seen.
