The news is not too encouraging for the rupee in August. Indian Rupee ended up as the worst performer in Asia in month of August. Escalating trade tensions and a weak Yuan took its toll on the Indian rupee as it slumped nearly 3.50% in the first half of August. During August, the rupee weakened from Rs.68.50/$ to Rs.71.50/$ as FPIs have been on a consistent selling spree and there has been a rush by importers and banks to cover their open dollar positions. The Philippine Peso and the Korean Won also saw deep cuts but the cuts on the INR were much sharper. In Asia, the Japanese Yen was the strongest currency.
Lower Inflation could be good news for markets as it apparently paves the way for central bank’s accommodative stance. For the month of July, the CPI inflation came in lower at 3.15% while the WPI inflation was at a multi-year low of 1.08%. The sharp fall in both the inflation numbers has given room for the Monetary Policy Committee to sustain the accommodative stance. While the MPC pointed to growth as the key driver for accommodation, tepid inflation continues to be a key factor. This lower inflation, especially lower producer inflation, is likely to give comfort level to the MPC members.
Unfurling the flag at the Red Fort, the Prime Minister Narendra Modi underscored that the government would make all-out effort to encourage wealth creators. In his Independence Day speech, PM Modi alluded to the FPI tax by underlining that wealth creators and job creators were the core of the Indian economy. PM also asked all the regulators not to look at wealth creators with suspicion. While alluding to the wealth created by the equity markets in India, the prime minister also warned that due to population explosion GDP per capita was stagnating at below the $2000 mark for a long time.
Mutual funds appear to be increasingly betting on the consumer segment in a big way. In fact, the large Indian Mutual Funds bet heavily on tech, private banks and consumers in July. Despite the vagaries of the market, equity funds and ELSS saw combined inflows of Rs.14,000 crore during July. On a MOM basis, the mutual funds increased weightage in technology, consumers, healthcare and private banks. At the same time, July also saw mutual funds reducing their weightage in sectors like NBFCs, automobiles, PSU Banks, capital goods and metals. The correction had restored valuation comfort for MFs.
The sharp correction in the Dow on Wednesday by 800 points was a reaction to the recession indicated by the inversion of the US yield curve. The yield on 2-year bonds exceeded that of 10-year bonds. In the past, such an inversion has been indicative of a likely recession in the US economy. A large part of the global weakness in the last 18 months has been driven by the US-China trade war. One of the classic outcomes of the recession fear has been a sharp cut in Brent prices. In fact, Brent Crude fell nearly 2% on global recession worries as trade talks go slow. Oil dipped as low as $57.60/bbl on Thursday but managed to recover from lower levels on expectations that the OPEC may go for further supply cuts. Apart from the recession fears, the rising oil inventories in the US are also lowering oil prices.
Without exactly being heavy handed, China has issued a subtle warning to Hong Kong protestors. The Chinese paramilitary forces conducted a drill in a stadium in Shenzhen, just across the Hong Kong border. However, most diplomats are confident that China may not roll out the PLA in the streets of Hong Kong. The Special Administrative Region (SAR) of Hong Kong has seen massive protests against greater Chinese role in administration of Hong Kong. These protests had been sporadic since 1997 when Britain handed over Hong Kong to China, however it has intensified recently.
