Dear readers, if you will remember we used to post monthly market review till some time back. Modifying that a bit, we have come out with the weekly version of the update covering equity, currency, gilts, crude oil and a brief note on China interest rate move.

Equity markets

  • Sensex slid 135 points or 0.7% for the week to close at 17558. The index started the week on a bullish note but later in the week negative global sentiments created due to rating downgrade of Greek bonds pushed the market down by 1.7% on Wednesday.
  • Successive upward moves for the next two days helped the index to regain most of Wednesday’s loss. Federal Reserve of USA in its rate announcement re-iterated that “low interest rates are appropriate for an extended period of time.”
  • With earning season coming to an end, markets are looking towards international economy for direction. American and European indices closed in red on Friday which has led to a gap-down opening in Indian markets.
  • The news that EU and IMF have agreed for a bailout package for Greece will affect the markets positively. Markets are expected to remain range-bound with a positive bias and figures for cement sales and automobile sales will be watched closely.

Currency – USDINR

  • Rupee started the week with a strengthening bias opening 13 paise up from last week’s close of Rs.44.22 per dollar but gradually during the week it weakened along with weakness observed in the equity markets.
  • But towards the end of the week, buying from FIIs led to a strong come back in the rupee and it closed at its highest level in 2 weeks at Rs.44.25 per dollar, gaining 17 paise or 0.4% up from last week. This is the 4th straight monthly gain in rupee.
  • RBI Governor Mr. Subbarao said in Washington that steps might be taken to curb the excess inflow of funds in the Indian markets as surging rupee is hitting exports. This would restrict any major upside move in rupee for the week but we expect that the rupee will strengthen this week buoyed by the inflow of funds.

Government Securities (G Sec/Gilts)

  • 6.35% 2020 benchmark bond registered very low volumes for the week as new 10 year bond was to be issued by RBI. Yields on 7.02% 2016 bond fell 10 bps on Tuesday on short covering and value buying.
  • Bond yields remained almost at the same level thereafter only to strengthen a bit before the auction results were announced on Friday, but aggressive pricing of new 2020 bond led to a sell-off in the bonds and the 7.02% 2016 bond closed at 7.55%, 11 bps down from previous week.
  • The new 7.8% 2020 bond has been seeing good volumes in the first half of trading on Monday. We expect the trading volumes to shift to the new bond and bond markets to trade with a slight upward bias as traders resort to profit booking and markets take cues from international markets.

Crude Oil

  • Crude oil opened the week on bearish note at $85.22 per barrel owing to concerns regarding Goldman Sachs case and growing uncertainty in the Euro region regarding Greece and fears of it spreading other Euro region economies. Crude fell for the first two trading sessions reaching a low of $ 81.70 on Tuesday.
  • Thereafter, crude showed a consistent rise over the entire week, rising $5 from the intraweek lows, ending the week at $86.15 per barrel on Friday owing to optimism regarding the Euro zone, pointing to a strengthening economy in the second quarter, lower unemployment figures in US and Greece readied severe austerity measures on Thursday to secure a multi-billion-euro aid from IMF and EU and avoid default.
  • Crude are likely to rise in the coming week as well, on expectations of strong international markets and announcement of bailout package for Greece of €30 billion by IMF and Euro region.

China interest rate move

  • The People’s Bank of China (PBOC) announced Sunday it was increasing commercial banks’ reserve requirement ratio (RRR) by 0.5 percentage points, taking the RRR of large banks to 17% and that of small- and medium-sized banks to 15%.
  • The increase, which goes into effect May 10, is the PBOC’s third such hike this year and is estimated to drain out about 300 billion yuan ($43.9 billion) in liquidity from the Chinese banking system.
  • The RRR hike is viewed as a fundamentally positive tightening measure, as it is still in the early part of the tightening cycle, which should help contain inflationary pressures, prolong the current economic expansion cycle and provide cushion for future policy flexibility.
  • The RRR hike is likely to have a modest immediate impact on banks’ margins as they are forced to park more funds with the PBOC at low interest rates. But subsequently, banks’ interest-rate margins were likely to improve, as tighter credit conditions would boost interest rates in the interbank money markets, where most of the listed banks are net lenders.

Hope this was informative. Your suggestions/comments would be highly appreciated.

Authors: Praveen Bajaj, MBA Finance

                 Abhijeet Ahir,MBA Finance