Will the Budget be a non-event this year? - a guest post

As Q3 results season comes to an end in February every year, business newspapers, their online counterparts and TV channels try to build up a feverish hype around the annual budget.

It is a mad rush to grab readership and viewership, with experts of all shapes and sizes expounding their views about the kind of proposals the Finance Minister should or should not announce.

In this month's guest post, Nishit mentions some of the important factors that are affecting the economy and the stock market, which may turn the budget into a non-event this year. 

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It is time for the annual ritual of the Union Budget. Every year the Budget is hyped up to be the magic wand that solves all the fiscal problems of the country. This time things are a bit different. Global headwinds are ensuring that there is not much optimism among market players.

Domestically, the passage of the key reform bill of GST will outweigh anything which the Budget has to offer. If the GST bill does not go through, the market will continue its journey downwards. If the GST bill gets passed, the Nifty may well rally by 1000 points.

There are calls for the Finance Minister to avoid further fiscal consolidation and the deficit target of 3.9% of GDP with more spending to stimulate the Indian economy. The danger of doing that is FIIs may increase their selling.

The second factor that is hampering the markets in India is the selling by Sovereign Funds of the oil producing countries. All these years, they had pumped in money as investments from their surplus earnings due to high oil prices. Now they are liquidating their investments.

The third factor is the Banking Sector NPAs. With the Reserve Bank cracking the whip, it is time for the Banking Sector to feel the pain. 'Crony capitalism' of several decades is getting exposed. The Banking and Finance Sector constitutes almost 30% of major Indices.

With all these extraordinary factors, the Budget has been reduced to a non-event this year. Unless the Finance Minister pulls out some rabbit out of his hat, we are going to see the stock market stuck in a range.

The most likely outcome of the Budget is a further increase in Service Tax from 14.5% to 16%, which is close to the expected GST rate, and also some exemptions for the Individual Tax payer. Nothing more and nothing less.

GST is the game changer and if the Government manages to push it through then it would give a major sentiment boost to the market, else status quo will continue till India Inc start reporting better earnings.

These are the some of the reasons why there has not been a pre-budget rally this year.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

Nifty chart: a midweek update (Jan 20 ‘16)

FII selling continued unabated this week. Their net selling in equities totalled almost Rs 3400 Crores, as per provisional figures. Interestingly, DIIs were net buyers of equity worth Rs 3900 Crores, but could not prevent Nifty from falling to a 19 months low.

Merchandise exports dropped for the 13th straight month, falling nearly 15% YoY in Dec '15 to $22.3 Billion. Imports fell by only 3.9% to $34 Billion.

For the Apr-Dec '15 period, trade deficit was lower at $99.2 Billion against $111.7 Billion in the same period in 2014, thanks mainly to lower import cost of oil.

The long-term closing chart pattern of Nifty 50 has completed a bearish 'rounding top' pattern by falling convincingly below the support level of 7550. The 'rounding top' is clearly visible on the 200 day EMA.

It may be a good time to take a relook at the blog post on Jan 6 where possible lower support levels were mentioned. 

The important level to watch is 7120 (which is the 50% Fibonacci retracement level of the entire rise of 3672 points from the Aug '13 closing low of 5285 to the Mar '15 top of 8957). 

The current level of the 200 week EMA (not shown) is 7085. A convincing breach of that level may mark the end of the long-term bull market.

All three daily technical indicators are looking oversold. The TRIN breadth indicator is approaching extremely oversold conditions. 

Nifty looks ripe for a technical bounce. But continued FII selling can negate technicals.

Caution should be the watchword. Next week has F&O expiry and Republic Day holiday. Better to stay away for now and let the dust settle.

(Note: Thinking of adding quality mid-cap and small-cap stocks to your portfolio? Subscribe to my Monthly Investment Newsletter. Paid subscriptions are being offered to blog visitors, followers and subscribers for 1 more day only - till Jan 21, 2016. Contact me at mobugobu@yahoo.com for details.)

Nifty chart: a midweek update (Nov 18 ‘15)

The WPI inflation number for Oct ‘15 came in at –3.81% – its 12th straight month of degrowth. In Oct ‘14, the WPI number was 1.66%. RBI’s focus has shifted to CPI inflation, which has began to rise again.

Exports continued its downward trend for the 11th month in a row, falling by 17.53% to $21.35 Billion in Oct ‘15. Imports were also lower by 21.15% to $31.12 Billion – resulting in a decline in the trade deficit to $9.77 Billion.

FIIs were net sellers of equity worth Rs 2300 Crores during the first three days of the week, as per provisional figures. DIIs were net buyers of equity worth Rs 2200 Crores.

Despite the down trend in the stock market, domestic investors are keeping faith in equities – as evidenced by the swelling AUMs of fund houses.

The daily bar chart pattern of Nifty is in the midst of an intermediate down trend within a larger down trend that started in Mar ‘15.

The large downward ‘gap’ formed on Aug 24 ‘15 got completely filled by the rally from the Sep ‘15 low – following which the down move resumed.

Note that the ‘inverse head and shoulders’ pattern that formed just below the ‘gap’ was negated once the index dropped below the ‘neckline’ of the pattern (which coincided with the lower edge of the ‘gap’).

What next? Lower levels on the index. How low? At least a test of the Sep ‘15 low of 7540. Can the index fall even lower?

Nothing can be ruled out when FIIs are selling as if there is no tomorrow. However, all four daily technical indicators are looking oversold.

A technical bounce can happen at any time. But it may not be a strong one.

BSE Sensex and NSE Nifty 50 index chart patterns – Jul 31, 2015

Auto sales of several manufacturers showed healthy double-digit growth during Jul ‘15, with M&M being an exception. That was the good news. Now, some bad news.

India’s fiscal deficit during Q1 (Jun ‘15) touched almost $45 Billion, more than 50% of the target set for the whole year. 16% surplus monsoon rains in Jun ‘15 was followed by 17% deficit across the country in Jul ‘15.

However, rainfall was fairly widespread (except in South India) with several states receiving heavy rainfall.

After 2 months of net selling, FIIs were net buyers of equity worth Rs 2300 Crores during Jul ‘15 (as per provisional figures). DIIs became marginal net buyers of equity worth Rs 72 Crores – thanks to heavy buying on the last day of the month.

BSE Sensex index chart

A steep up trend line drawn on the daily bar chart pattern of Sensex last week (marked 1) got breached by heavy selling during the first 2 days of the week.

Steep up trend lines tend to get breached easily (the possibility was mentioned in an earlier post) so it should not have come as a surprise.

The index found strong support from the lower edge of the ‘support-resistance zone’ and the 200 day EMA, and bounced up sharply above its 20 day and 50 day EMAs into bull territory.

A second (less steep) up trend line has been drawn, which is expected to support the index during the next leg of the up move.

What if Sensex is undergoing a pullback to up trend line 1? Wouldn’t that become a selling opportunity? Technically, no. Why? Because Sensex is clearly undergoing a bull market correction/consolidation.

How can one be sure? By looking at the 50 day and 200 day EMAs. The 50 day EMA moved down towards the 200 day EMA, but has started moving up again – preventing a ‘death cross’.

The rising 200 day EMA flattened out during May and Jun ‘15, but has started to rise again. Also, the index appears to be forming a ‘rounding bottom’ or a ‘cup-and-handle’ pattern.

Either pattern – if it plays out – will lead to upward break outs. The strategy should be to ‘buy on dips’ and not to ‘sell on rises’ (which is a bear market strategy).

Daily technical indicators are turning bullish, though ROC and Slow stochastic are still in bearish zones. Stay invested.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty dropped below its 20 week EMA intra-week, but bounced up strongly with good volume support to make marginal weekly gains.

Likely resistance from the zone between 8630 (top edge of the ‘support-resistance zone’) and 8670 (the 61.8% Fibonacci retracement level of the entire fall from the Mar ‘15 top of 9119 to the Jun ‘15 bottom of 7940) will be the next hurdle for bulls.

Three of the four weekly technical indicators are looking bullish. MACD is rising above its signal line in positive zone. RSI has crossed above its 50% level. Slow stochastic has climbed to the edge of its overbought zone. Only ROC is looking bearish by falling towards the ‘0’ line.

Nifty is trading above its two weekly EMAs in a bull market. Bulls are regaining their control over the chart.

Bottomline? The bar chart patterns of Sensex and Nifty may be in the process of forming bullish continuation patterns. Long-term trends remain bullish, so dips can be used as adding opportunities. Choose ‘good’ stocks and maintain suitable stop-losses. Stick to MFs if stock picking is not your cup of tea.

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 17, 2015

India’s Current Account (i.e. trade) deficit was almost $12 Billion in Mar ‘15 – nearly double of the deficit in Feb ‘15. Exports were lower by more than 20%. For the fiscal year 2014-15, the deficit was $137 Billion – compared with $135 Billion in the previous fiscal year.

Sentiments remained bearish in a holiday-shortened trading week. As per provisional figures, FIIs were net sellers of equity worth Rs 365 Crores; DIIs were net buyers worth Rs 490 Crores. Both Sensex and Nifty lost ground.

Despite weak Q4 results declared by Indian companies so far, Moody’s have reaffirmed their bullish outlook for the Indian economy. The government needs to accelerate infrastructure investments to keep the economy on the growth track.

BSE Sensex index chart

The daily bar chart pattern of Sensex closed above the 29000 level on Mon. Apr 13, but it wasn’t a convincing close above the ‘support-resistance zone’ between 27350 and 28800. Bears struck swiftly and pushed the index below its entangled 20 day and 50 day EMAs inside the ‘support-resistance zone’.

Daily technical indicators are still in bullish zones, but showing downward momentum. MACD is above its signal line but looks ready to drop back inside negative territory. ROC has dropped from its overbought zone and crossed below its 10 day MA. RSI is falling towards its 50% level. Slow stochastic has fallen from its overbought zone.

Some more correction is likely. Looks like company earnings may take a couple of more quarters to catch up with market valuation. However, the index continues to trade above its rising 200 day EMA in a bull market.

Stay invested and closely study Q4 results for pockets of opportunity.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty formed a ‘reversal week’ pattern (higher high, lower close) and dropped back inside the ‘support-resistance zone’ between 8180 and 8630.

The index continues to face overhead resistance from Up trend line 2, but managed to stay above its two weekly EMAs in a bull market.

Weekly technical indicators are giving mixed signals. MACD is sliding below its signal line in positive territory. ROC is below its 10 week MA, and failed to enter positive zone. RSI is moving sideways above its 50% level. Slow stochastic crossed above its 50% level.

Expect the index to consolidate around current levels for some time before resuming its up move. IPOs and FPOs are getting oversubscribed – which is a clear indication of underlying bullish sentiment.

Bottomline? BSE Sensex and NSE Nifty charts are still feeling the effects of bearish sentiment, and have dropped back inside their ‘support-resistance zones’. Both indices are in long-term bull markets. There is no need to panic and sell. Stay invested. Maintain appropriate stop-losses for individual stocks in your portfolios.

Fundamentals are improving – why is the stock market still correcting?

Are the fundamentals really improving? The short answer is: Yes. Let us look at some facts:

1. WPI inflation dropped to its lowest level in 5 years. CPI inflation also dropped - below 6.5%. The primary reason for this drop is lower food prices – which is not due to any monetary action by RBI or fiscal action by the government.

However, there is no denying that inflation is moderating, which raises the prospect of an interest cut by RBI sooner than later.

2. Commercial vehicle sales have picked up in Sep. ‘14 after 16 months of decline. That is a clear sign of a turnaround in the economy.

Passenger vehicle sales dipped slightly in Sep ‘14 – but that is probably due to seasonal reason. Dussehra, Eid, Dhanteras, Diwali are being celebrated in Oct ‘14 – an ‘auspicious time’ for vehicle buyers. Purchases may have been postponed in Sep ‘14.

3. Oil prices have fallen significantly – due to oversupply in the international market. India’s oil import bill has come down. Petrol price has been reduced. Expect a cut in diesel price soon. This will help in curbing inflation.

4. The trade deficit has narrowed by 8.2% during the first half of the year (Apr to Sep ‘14) compared to the same period last year – despite a sharp jump during the month of Sep ‘14 due to a big increase in gold imports.

In US Dollar terms, exports grew by 6.5%, while imports grew by 1.6% during Apr to Sep ‘14.

5. Despite a surge in the Dollar index, the Rupee has been relatively stable in the 60-62 range against the US Dollar. Infosys has already declared good Q2 results. Expect other large IT players to also show improvement in top and bottom lines.

The macro fundamentals are definitely better than a year ago. To answer the larger question, one needs to remember the famous quote from Benjamin Graham, who is considered the ‘father’ of value investing:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

What it means is that sentiments rule the market in the near-term. Why are sentiments bearish now? The main reason is selling by FIIs. Despite record inflows into Indian mutual funds, DII buying hasn’t kept pace with FII selling.

Why are FIIs selling? There has been some disappointment with the lack of speed of the Modi government in implementing much-needed reforms in financial and labour sectors. Declining growth in China and Germany, and a likely hike in interest rate in the USA have also caused a more cautious approach by FIIs.

Eventually, the market will ‘weigh’ the improving fundamentals, and the stock market will resume its up move and touch new highs. The question is: When?

How about from Mon. Oct 20 ‘14? Exit polls indicate a possible sweep by the BJP in the just-concluded state elections in Maharashtra and Haryana. Results will be declared on Sun. Oct 19 ‘14.

Government formation by BJP in both states may be just the positive fillip the stock market is awaiting.

BSE Sensex and NSE Nifty 50 index chart patterns – Aug 14, 2014

A holiday-shortened trading week often means both bulls and bears turn circumspect and reduce positions. But last week was a bit different, as FIIs and DIIs turned net buyers. Technically, both indices were at important support levels – so the upward bounce wasn’t a total surprise.

WPI moderated a bit, but CPI inflation rose due to higher food prices. The IIP number was positive, but lower than expected. The ‘green shoots’ of growth are showing signs of withering. PM’s slogan of “Come, make in India” during his Independence Day speech indicates the need for more FDI to kick-start growth.

India’s trade deficit crossed the $12 Billion mark, increasing by $0.5 Billion over the previous month and putting pressure on the Rupee. The unrest in Ukraine and economic sanctions on Russia are beginning to affect Eurozone economies. Stock markets in USA, Europe and even some markets in Asia are trying to recover from sharp corrections. Sensex and Nifty have been comparative outperformers.

BSE Sensex index chart

Sensex bounced up nicely after receiving good support from its 50 day EMA, and is trading above all three EMAs in bull territory. Fears of a big crash have been belied. Wave theorists are scrambling to review their counts – proving once again that it is futile to predict index movements.

Is the index all set to scale new highs? It would appear so from the bullish signals emanating from the technical indicators. MACD is ready to cross above its falling signal line in positive zone. ROC has crossed above its 10 day MA into positive territory. RSI is showing a bit of weakness by moving sideways just below its 50% level. Slow stochastic has climbed sharply above its 50% level.

The index is at the same level that it was on Jul 7 more than 5 weeks back. However, the rising 50 day and 200 day EMAs shows that the up trend is clearly in force. As small investors, we should make the trend our friend, instead of trying to second-guess index movements. Two dips during Jul and Aug provided adding opportunities.

Keep investing your savings regularly according to a plan. Let others worry about why the Sensex is moving up, down or sideways.

NSE Nifty 50 index chart

In last week’s analysis of the weekly bar chart pattern of Nifty, technical signals were used to explain why bulls were at an advantage in the near term. For the third time during the past 14 weeks, the index bounced up after finding support from the lower edge of the upward-sloping channel.

The index is trading above all three weekly EMAs in a long-term bull market. Weekly technical indicators continue to look overbought. MACD has merged with its signal line inside its overbought zone. RSI dropped down from its overbought zone, but looks ready to climb back in. Slow stochastic is moving sideways inside overbought territory.

An index (or stock) can remain overbought for long periods during a bull market. Instead of worrying about a correction, which can happen at any time, stay invested with a trailing stop-loss.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are in long-term bull markets. Periodic corrections should be used as adding opportunities. Both indices are near their all-time highs. It may be better to add to existing positions than to look for new ideas all the time. Selling one stock at a small profit and immediately jumping on to another one is unlikely to provide great returns.

Nifty chart: a mid-week update (Dec 11, ‘13)

The euphoria among investors following announcement of election results in four states and one union territory last Sunday led to Nifty opening with an upward gap and touching lifetime intra-day and closing highs on Mon. Dec 9 ‘13.

But the bullish cheer appears to be fading already. Today’s trade has closed Monday’s upward gap. Even the ‘good news’ of a narrowing trade deficit was ignored by the market. DII sales overwhelmed FII buying.

So, what should investors do now? Take profits home and park the cash in safe tax-free bonds that are on sale now? Or, use the dip to add to existing holdings?

The answer to the question will depend on your risk tolerance and asset allocation plan. Still don’t have an asset allocation plan? Then you will be forever at the mercy of stock market gyrations – not knowing when and how much to buy or sell.

For those who have been following my posts regularly and/or have adequate knowledge of technical analysis, there should be no doubt at all that Nifty is in a bull market – and has been in one for almost 2 years. So, the strategy should be to either buy on dips or hold.

What about filling of Monday’s upward gap? Note the two upward gaps that formed back in Sep ‘13 during the rally from the Aug ‘13 bottom. Both got filled during the subsequent correction – but Nifty resumed its up move and touched a higher top in Nov ‘13.

That is typical chart behaviour in bull markets. Most upward gaps tend to get filled (or part-filled) reasonably quickly – charts don’t particularly like gaps – but up moves resume thereafter. (The reverse happens in bear markets – downward gaps get filled by rallies and the down move resumes thereafter.)

Daily technical indicators are in bullish zones but showing some bearish signs. MACD is above its signal line in positive territory, but its upward momentum has slowed down. RSI is above its 50% level, but turning down. Slow stochastic has dropped from its overbought zone, but is above its 50% level.

Note that all three indicators are showing negative divergences by failing to touch new highs with the index. However, all three EMAs are rising and Nifty is trading above them. So, Nifty is in the midst of another bull market correction/consolidation.

How low can the nifty fall? 6100 - 6200 looks like a good support zone.

Nifty chart: a mid-week update (Oct 09, ‘13)

The down trend in Nifty, which started after the index hit its May ‘13 top, lasted till the end of Aug ‘13 – dropping the index into bear territory. Most market experts started predicting much lower levels of 4500 and 3700. Sentiments were quite negative. Economic news was getting worse by the day.

As often happens when consensus is bearish, the index jumped up sharply during Sep ‘13. Even seasoned investors and experienced analysts were surprised by the high volume of buying. Such sharp rallies seldom sustain. Daily technical indicators showed overbought conditions, and a couple of them displayed reversal patterns.

A correction ensued and the index dropped quickly to its 200 day EMA by the end of Sep ‘13. The subsequent ‘V’ shaped recovery has taken the index above the psychological 6000 level at the end of trading today. Can the index sustain above the 6000 level and move up to touch a new 52 week high?

Technical indicators are turning bullish, so a new high is definitely within the realm of possibilities. MACD has crossed above its signal line in positive zone. ROC has crossed above its falling 10 day MA into positive territory. Both RSI and Slow stochastic have moved above their respective 50% levels. All three EMAs are rising, and Nifty is trading above them – which is the sign of a bull market.

The current account deficit reduced considerably, thanks to lower imports and higher exports. The reduction in deficit should allay a major concern of overseas investors. But the parting of ways between Bharti and Walmart may queer the pitch for FDI in multi-brand retail. Uncertainty due to the US debt ceiling problem is another bearish overhang.

Be cautiously optimistic. That means accumulating fundamentally strong stocks, but with proper stop-losses.

RBI’s liquidity squeezing – a guest post

Vote-bank politics with schemes like NREGA, food securities bill, and hugely hiking the pay of government employees – not to speak of fertiliser subsidy, oil subsidy – has led to a bloated fiscal deficit in India.

Slowdown in global economies – including in India – and rising oil prices have added to the Current Account deficit. Instead of taking pro-active steps to curtail the twin deficits and put GDP growth back on track, the government tried to coerce RBI into reducing monetary controls to re-energise growth.

Instead of succumbing to pressure, the RBI Governor stuck to his hawkish stance against inflation. He is paying the price by not getting an extension of his term in office. His latest step to stem the fall in value of the Rupee by tightening liquidity has not been well-received by the stock market.

In this month’s guest post, Nishit discusses the likely effect of RBI’s action on Gilt Fund yields.

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Recently, the RBI indirectly raised Interest Rates by squeezing liquidity to curb the pressure on the Rupee. This led to a spike in bond yields from 7.5% to 8.1%. Many of the debt funds lost 3-4% of their NAVs. Many must have panicked, as this had never happened before and can almost be called a ‘Black Swan’ event.

So what does it mean for Gilt funds going ahead? The basic objective of Gilt funds is that they are meant for long term investors when the interest rates are coming down, to capitalize on the increase in Bond Prices when yields come down. One is supposed to exit when the trend has changed and the bond yields are going up.

Was RBI’s intervention a signal that Interest Rates may be going up? I do not think so. The economy is in shambles and to simulate the economy, rates have to come down. RBI’s action was just a one-off blip as a desperate government tried to stop the Rupee from devaluing further.

Bond Yields, which had spiked to 8.1% towards the end of the week, came down to 7.9%. If there are no more unpleasant surprises, then the yields could touch the record low of 7.1% by December. The spike in yield was a buying opportunity for the long term investor.

The very fact that the yield rose from 7.56% to 8.10% and back to 7.94% means that the market had over-reacted and yields are coming down.

The RBI policy on the 30^th of July ‘13 will give further guidance on what the RBI intends to do. As I see it, they will maintain a status quo and will neither raise nor cut Interest Rates.

In real terms, home loan rates will not come down. The Auto or the Realty sectors’ hopes of a stimulus will have to keep waiting.

Long-term investors do not need to worry. Only short-term traders, and Banks who conduct treasury operations, will take a hit. Till the economy turns around, I do not see Interest rates rising.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

About weak IIP and strong Infy

The IIP number for November 2012 came in at a disappointing –0.1% compared to the 6% growth in November 2011. That means factory output shrank marginally from the year-ago month. The economy is still down, and only strong reform measures and a decent budget may shake it up from its somnolence.

For the Apr to Nov ‘12 period, IIP grew by a puny 1%, compared to a 3.8% growth during the same period in 2011. Mr Montek Singh Ahluwalia of the Planning Commission tried to put an interesting spin on the negative number – by saying that it was a statistical aberration because Diwali was celebrated in November in 2012.

That wasn’t the only bad news. Exports fell for the 8th straight month. However, the trade deficit reduced to $17.7 Billion in December from $19.3 Billion in November. Thanks to shrinking exports and the poor IIP figure, Rupee lost value despite strong FII inflows.

The poor IIP figure raised hopes of an interest rate cut by RBI later in the month. However, the inflation figure expected on Monday (Jan 14) will determine whether the RBI will cut rates. Even if it does, it is unlikely to be more than 25 bps – which may have very little effect on the market.

Surprisingly positive noises from Infosys management helped to prop up the stock market. Q3 revenues rose by 12% from the year-ago quarter, but net profit was down 0.1%. However, the full year and Q4 guidance were raised, which cheered the market no end.

After several quarters of disappointing results, which led to excessive selling of the Infosys stock, today’s euphoria was also a bit overdone. The stock opened up with a huge gap above its 200 day EMA, backed by a sharp increase in volumes, and rose nearly 17%.

Interestingly, the large gap in the Infosys chart formed on Apr 13 ‘12 – which was partly filled during Sep ‘12 – has not yet been fully filled. But that may be a moot point. The 2 years long down trend in the stock may be getting over.

Does that mean it is a good time to buy the Infy stock? If you missed buying on the break out today, you may get another chance if there is a pullback towards the 200 day EMA. Such pullbacks often follow sharp break outs. 

Does India deserve the ratings downgrade by S&P?

The answer to the question will depend on who is answering it! The Finance Minister and a Deputy Governor of RBI brushed the S&P ratings downgrade aside as if it was a fly buzzing around while you were trying to enjoy your breakfast. An irritation at best, but of no particular significance.

Adrian Mowat of JP Morgan had a different view. He didn’t expect that FII or FDI inflows would be affected by much. The GAAR provisions, if applied retrospectively, would cause much greater damage to overseas investor sentiments.

However, those companies that had borrowed large sums of money through the FCCB route during the hey-days of 2006-2007 may be in a spot of bother. Most of their share prices are trading at a small percentage of the soaring heights they reached during the final stages of the previous bull market. Converting the FCCBs to equity at current lower prices may not be an option because the promoters may lose control.

The other option is to repay the amounts borrowed. This is where the problem may lie. Since several companies don’t have the cash to repay their borrowings, they have been trying to negotiate a rollover of their loans with the lenders. The S&P downgrade has put paid to that option.

There is a third option – which the unscrupulous Ruias of Essar group availed. Default on the loans, and buy time while the matter meanders through the courts. A few companies may have no alternative but to default. Those who value their reputation may be forced to sell some of their assets to raise the cash.

Why did S&P downgrade India’s credit rating in the first place? And was the downgrade fair? There should be no doubt in any one’s mind that India’s fiscal and current account deficit situation is in danger of spinning out of control. Faulty policies that placed politics ahead of economics, and inability to introduce tough and unpopular legislation has caused a financial mess and an unmanageable rate of inflation.

So, S&P’s downgrade should not have come as a great surprise. In fact, it may just be the kick on the backside needed to propel the moribund financial reforms process back to life. But was the downgrade fair? Aren’t countries like Spain and Ireland - which have much more precarious debt-to-GDP ratios than India’s - enjoying better credit ratings? Is it because they are ‘developed countries’ while India is still an ‘emerging economy’?

Moody’s came up with a credit rating that was more optimistic than S&P’s. That calmed some of the initial shock that the stock market experienced. But S&P’s downgrade should be treated as a wake-up call by the Finance Minister. Blaming the opposition and coalition partners won’t get us anywhere. It is time for precipitate action. The stock market is awaiting bold policy actions to resume its up trend. It will also help accelerate the government’s disinvestment policy and fill some of the fiscal gap.

Should you ignore the Feb ‘12 IIP number?

For the uninitiated, the Index of Industrial Production (IIP) is one of the many indicators that policy makers look at to assess the strength or weakness of the broader economy. So, why should investors ignore the IIP number declared today? The short answer is: The figure is unreliable at best, and fiction at worst.

Am I being harsh? Sure. But how else can I describe an important indicator if the Jan ‘12 number is revised downwards from 6.8% to 1.14%? The reason for the sharp downward revision was an ‘error’ in the calculation of production data for sugar. Production figures from all the sectors don’t always come in on time. A ‘best guess’ is often made for the numbers from the missing sectors. That still doesn’t justify an 83% error!

What about the Feb ‘12 number of 4.1%, which was much lower than the consensus estimate of 6.6%? It is better than the revised Jan ‘12 figure of 1.14%, but who can say whether another ‘error’ won’t crop up after a month? Either way, 4.1% is not worth cheering at all. It shows that industrial growth remains sluggish.

Why did the stock market celebrate a not-so-great number? It was probably on the expectation that next week the RBI will be forced to cut the repo rate after almost three years to help stimulate growth. But the RBI is in the horns of a dilemma.

They have taken a stance that controlling inflation is their top priority. While inflation is no longer in double digits and is expected to fall some more, it is still quite high and may start going up once again as the base effect kicks in. The RBI also expects the government to take worthwhile steps in curtailing its huge deficit, which is partly responsible for causing inflation.

But the government is showing no inclination to cut down wasteful expenditure on populist measures. Instead, the Finance Ministry is desperately trying to generate revenue by milking cash-rich PSUs and by introducing measures that may cut-off FII inflows (which will further compound the deficit problem).

If RBI cuts the repo rate and inflation goes up after a couple of months, they will look like fools. If they don’t cut rates and growth slows down further, they will be made a scapegoat for all ills. They may compromise by reducing the CRR once again to inject more liquidity into the system. Alternatively, they may cut the repo rate by a token 25 bps (0.25%) – which seems to be already priced in by the market.

What could be a positive surprise for the market? A CRR cut and a 25 bps repo rate cut or a repo rate cut of 50 bps. If either of those two events occur, the stock market may trend upwards from its current consolidation range.