The only silver lining for the markets were continued FII flows which topped $150 million last week
The stock market continued to totter within a tight range, failing to cross 5,400 decisively and closing the week about 0.86 pct higher at 5,366. Angela Merkel's support for ECB efforts resulted in world markets registering gains.
The markets looked for cues overseas as domestic indicators were mostly in the red. The only redeeming feature was inflation, which came in at 6.87 per cent compared with 7.25 per cent.
But food inflation continued to be in double digits. This "flash in the pan" may not convince the Reserve Bank of India (RBI) to change its stance and I expect the hawkish scenario to continue looking at the monsoon situation.
The prime minister's Independence Day speech laid to rest the hopes of any big bang policy measures. One could sense his government's helplessness in going ahead with reforms due to the difficult political scenario.
The Prime Minister's Economic Advisory Council projected 6.7 per cent GDP growth for 2012-13 and an inflation range of 6.5 per cent to 7 per cent, both of which seem quite optimistic going by the general consensus on the street.
International trade data disappointed with exports slipping 14.8 per cent in July compared to imports slipping 7.61 per cent, thus widening the trade gap. Imports were falling faster than exports during the April-June quarter due to lower oil prices and falling gold demand. That seems to have bottomed out and going ahead, unless exports show an upward tick, it would be difficult to improve the trade deficit.
The monsoon continued to improve, but is still 15 pct below long-term average (LTA) as of mid-August. Northwest India is the worst affected with rainfall 25 pct below LTA. Any improvement may only add to statistics without improving the fortunes of the farming community.
Around the weekend, Finnish Foreign Minsiter Erkki Tuomioja dropped a bombshell that his country, which is among the top AAA credit countries, could be preparing for the euro break-up. Closer home, The Comptroller and Auditor General of India (CAG) too dropped a bombshell, accusing the government of pursuing policies which benefited certain private companies and groups resulting in an alleged loss of around $33 billion to the exchequer. Most of it was attributed to the allocation of coal blocks by the coal ministry which was directly under Prime Minister Manmohan Singh. The CAG figures could be debatable but this report will cause pandemonium in parliament for a few days, thus delaying other important decisions.
It seems the incumbent government has already started working towards general elections in 2014 (or even earlier?) and one could expect the rollout of populist measures irrespective of the fiscal situation. As mentioned last week, one of the key bills which may get passed in this session is the Food Security Bill which alone would be enough for a downgrade of India. The finance minister met banking heads on Saturday and requested them to keep EMIs at affordable levels to boost consumption demand.
There is already a scare of rising NPAs among PSU sector banks. He also announced the rescheduling of farm loans in drought-affected states and this could just be the beginning of such measures to come in the next few months which instead of achieving fiscal consolidation as intended a few weeks back, will result in fiscal implosion. I had warned of such measures last week.
The only silver lining for the markets were continued FII flows which topped $ 150 mln last week. To quote the famous phrase "beauty is in the eye of the beholder", I wonder whether we are missing out something the FIIs have noticed in the Indian economy and markets.
The results season has more or less come to an end with most companies showing a better-than-expected performance as expectations were anyways pared down. Coal India declared an 8 per cent growth in net profits which was in line with expectations. The mining company had taken a hit due to recent wage hikes.
The company sells coal at close to 70 per cent of international prices and still maintains a healthy bottom line. Tata Steel results were impacted due to European operations which have been like a millstone ever since it was brought into its fold.
ONGC came out with 48 per cent growth in net profits but one cannot take a cue as the subsidy burden, which is subjective, could change fortunes in the next few quarters, especially due to bleeding refiners and marketing PSUs. ONGC, like Coal India, sells crude at a huge discount to international prices -- $46.60 per barrel during the last quarter.
This week too will be a truncated one with Monday being a holiday on account of Eid. The markets will react to the CAG report on Tuesday but may not see a deep cut as the FII fund flows will ensure a cushion at lower levels.
The markets have got accustomed to a spate of adverse domestic news which doesn't have an effect beyond a couple of sessions. I have been suggesting to investors to lighten the portfolio but it's still not time for traders to go short.
There could still be 3 per cent - 4 per cent upside for the broader markets by when FIIs may realise that the grass is not as green as it seemed -- it was a mirage.