Nifty managed a bounce ahead of trading holiday

On Wednesday, the Nifty managed a bounce ahead of trading holiday on short covering. The Hang Seng and the SET were up by over 2% while Jakarta and the Shanghai Composite were up by over 1% on Thursday. SGX Nifty has shown positive trend on hopes of a rupee rescue package. Rupee also strengthened to 72.185/$ and 10 year bond yields closed lower at 8.13%. The rupee and the bond markets were also shut on Thursday on account of Ganesh Chaturthi but there were some positive signals on Wednesday on hopes that a comprehensive rupee rescue plan should come through.

Some call it India’s Lehman moment, although it sounds a tad rich. IL&FS turns out to be the next big challenge for the Indian financial markets. IL&FS is currently struck with a major liquidity shortfall of close to $473 million. The IL&FS bonds have already been downgraded to Junk. But the big problem is that IL&FS has borrowed nearly $12.5 billion from banks, institutions and mutual funds. Also LIC has a 25% stake in IL&FS and hence it also becomes a systemic risk. The crisis got triggered when IL&FS defaulted on its ICD from SIDBI. This is a major worry for bond markets.

With a view to reducing prices of petrol and diesel, the government now looks to encourage3 ethanol mixing. In that regard, the Government hiked the procurement price of Ethanol. The 25% hike in the procurement price of Ethanol is likely to be a major boost for the sugar companies. Sugar prices have fallen sharply after sugar output ended at a record 35.5 million tonnes in the current sugar cycle. The higher ethanol prices will encourage more sugar output to be diverted to ethanol production, since sugar mills can now use sugarcane juice for ethanol, rather than just the molasses.

Inflation came in lower even as growth stayed constant. CPI Inflation fell to 3.69% in August and the IIP growth was flat at 6.6% for July. The retail inflation was led lower partly by the base effect and partly by lower food prices. The pressure of fuel prices continue. IIP for July continued to be flat as manufacturing continued to give a boost to the IIP overall. It remains to be seen how the RBI sets its policy overtone based on this data, especially considering the sharp fall in the Indian rupee. Markets are still expecting the RBI to hike rates by another 50 bps this year to stem the fall in the rupee.

In a new approach, SEBI will now expand the base of the commodity markets. SEBI is expected to approve commodities trading by foreign entities. Of course, this plan to hedge in commodity futures market will be opened for only those foreign players who have an underlying exposure in the physical commodity in India. Such Eligible Foreign Entities (EFE) can directly hedge in the commodity market against their underlying exposure and will be subject to a minimum net worth requirement of $5 lakhs. Exchanges will have to issue a Separate Hedge Code for these EFEs. The code will have to ensure that such positions are not naked positions but are actually backed by an underlying risk in the commodity. This has been a demand of the commodity market brokers for quite some time.

The Turkish central bank raised the benchmark rates to 24% to prevent a run on the Turkish Lira. In a single shot, the Turkish Central Bank raised benchmark rates by 625 basis points to 24% to stem the fall in the Lira. Erdogan has already passed an order limiting the use of foreign currency in domestic transactions. The Turkish Lira has already lost nearly 40% versus the dollar this year and the latest rate hike has been instrumental in bringing some semblance of strength to the Turkish currency. However, the Turkish economy continues to be highly vulnerable.

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