The Fed rate did come finally, although it was lower than anticipated. US Federal Reserve cut the Fed Funds Rates by 25 basis points with mildly dovish outlook. For the first time in nearly 10 years, the Fed cut the funds rate by 25 basis points to the range of 2.0-2.5% on July 31st. While the final testimony from Jerome Powell will hold the key, there was clear pressure from Trump on the rate cuts. However, the Fed desisted from a 50 bps rate cut as the markets were demanding and as even the CME Fedwatch was hinting at 15 days ago. The indicator is keeping the chart open on future rate cuts too.
Infrastructure segment is under strain and that is visible in the core sector numbers. In fact, core sector growth for the month of June eased lower to 0.2% compared to 4.3% in the month of May. The core sector captures the growth in 8 key infrastructure sectors that constitute more than 40% of the IIP. Within the oil basket, crude contracted by 6.8% and refining contracted by 9.3% in June. Cement also showed negative growth. Steel and electricity showed healthy growth in June on the back of higher investments and steel benefited during the quarter from a more protected market; thanks to tariffs.
Borrowings continue to expand and that remains the Achilles Heel for the government finances. Fiscal deficit touched 62% of full year target in the first quarter of FY2019-20. Fiscal deficit touched Rs.432,000 crore for the first quarter of the fiscal ending June 2019. Interestingly, this is better than the previous year when the fiscal deficit had touched 69% of the full year fiscal deficit in the first quarter itself. Government has set a target of 3.4% for the full year although a recent CAG presentation to the 15th Finance Commission pegged it at 5.85%. Of course, that still remains a debatable issue!
The V G Siddhartha episode appears to have had its first visible impact on the financial markets. DSP Mutual Fund writes down 50% of its exposure to Café Coffee Day after the incident. CCD group stocks were locked in 20% lower circuit for the past two days with no buyers on the counter. CCD has an outstanding loan book of Rs.8500 crore and that could be the next worry for credit risk funds. Interestingly, the promoter also had private loans of an equivalent amount and Indian mutual funds had also invested heavily in the debt of these companies via their credit risk funds.
Ahead of the Fed Policy on Wednesday, most traders chose to play it safe on rate sensitive counters. This resulted in aggressive short covering in banks and auto stocks. The CME Fedwatch has been indicating that the market may have reconciled to a 25 basis points cut by the US Fed with the probability of a 50 bps cut going below 20%. A/D ratio was favorable by a factor of 3:1. Even as monsoons have spooked the markets, heavy rains in fourth week of July exceeded long period average (LPA) by 42%. However, it is not clear whether the back-ended monsoons would really make a positive difference to the problem of delayed sowing. Overall, if one were to look at the first half of the monsoon season, there has been an overall deficit of 9% and the timing of the onset may be more meaningful.
Even as the trade talks in Beijing ended not a not-too conclusive note, Beijing termed the US-China trade talks as constructive. Even as no official opinion was available from the US or from China, Beijing did describe the talks as broadly constructive. With the US and China imposing heavy tariffs on imports, it has resulted in a visible slowdown in GDP growth in China. The bone of contention appears to be structural issues on IP protection, which China is not willing to commit. China has agreed to expand imports from the US and that has already been demonstrated by the Chinese government.
