INR, Equity markets slump after high start: RBI disappointed markets.
The Indian Rupee & the Equity markets sharply slumped after the much delayed announcements by RBI regarding measures to control the INR from depreciating. There were higher expectations to the announcements & the equity markets felt let down.
We had alerted early this morning: Huge surprises, Shock waves, highly unexpected & un-predictable turn of events should be expected of this week. Be prepared. That did prove right for the day & may prove even more accurate over the week’s events to come.
There were positive news from unexpected quarters & highly disappointing actions from where expectations were high for much bolder action.
Adding to the high start to the day was the announcement that, Moody’s Investors Service said on Monday it was maintaining a stable outlook for India’s Baa3 rating. It said slowing growth and higher levels of inflation were already factored into the outlook. Equity markets rise strengthened further on higher hopes,
Nifty July rose to 5224, close to the resistance level of 5230-75 range as alerted since a week now that selling pressure will build on rises above 5122 to 5230-75 range. Markets declined swiftly after the RBI announcements & Nifty July slumped to 5122.65 to close at 5133.65. There will be further declines as stocks tumble joining a global slump, on concern that the European Union summit will fail to produce any worthy outcome & tame the European crisis.
The Indian Rupee rose as high as 56.37 per dollar before the measures were announced but ended domestic trading at 57.01/02, edging back towards Friday’s record low of 57.32. Our expectation of a fall on a strong move below 56.35 to 58.60 is yet maintained.
The rupee has hit a succession of record lows this year in a slide that began in the middle of 2011. After the rupee hit another record low, Finance Minister Pranab Mukherjee said on Saturday that steps to arrest the slide would be unveiled on Monday, spurring rampant & very high market speculation. In a bid to check rupee’s free falling against the US dollar, the Reserve Bank of India (RBI) in consultation with the government has raised the FII investment limit in government securities by US$ 5 billion to US$ 20 billion. Besides, it also allowed Indian companies in manufacturing and infrastructure sector to avail of External Commercial Borrowings (ECBs) of up to USD 10 billion for repayment of outstanding rupee loans and for fresh projects with certain conditions. The enhancement of limit by US$ 5 billion in government securities came with a maturity of three years as against five years earlier.
Plan panel Deputy Chairman Montek Singh Ahluwalia has said more such measures as announced by RBI today are in the offing to revive growth momentum and boost inflow of foreign funds. He rejected the view that measures are inadequate as the markets did not react positively and rupee slid further immediately after the measures were announced by the RBI. RBI today relaxed investment norms for qualified foreign investors and allowed them to invest in the mutual fund schemes that hold at least 25% of their assets either in debt or equity or both in the infrastructure sector.
ECB announcements are unlikely to have any meaningful impact on the rupee level in the near-term. The steps were the latest by Indian policymakers trying to combat a loss of confidence in the economy, which slumped in the March quarter to its worst growth in nine years. Ratings agencies Standard & Poor’s and Fitch Ratings are threatening to downgrade the country’s credit rating to junk and foreign investors have exited as the government fumbled economic reform and raised the prospect of retroactive taxes. Economists have long said India needs to improve its economic fundamentals, including addressing its current account and fiscal deficits, to bolster the rupee.
Morgan Stanley estimates India’s current account deficit will widen to $72 billion by the end of June, from $49 billion a year earlier. That would put the current account deficit at between 4% and 4.5% ofIndia’s GDP. Inflation also remains stubbornly high, largely because of supply bottlenecks in the economy.
U.S. stocks tumbled, joining a global slump, on concern that a European Union summit will fail to tame a crisis which puts Standard & Poor’s 500 Index’s companies on pace for the first earnings decline since 2009.
Equities slumped as Chancellor Angela Merkel hardened her resistance to euro-area debt sharing, setting Germany on a collision course with its allies at a summit on June 28. Cyprus said it will seek a financial lifeline from the euro area’s firewall funds, becoming the fifth of the euro’s 17 members to seek a bailout. Greek Prime Minister Antonis Samaras consented to the resignation of his finance minister, Vassilios Rapanos. Billionaire investor George Soros warned that a failure by leaders meeting to produce drastic measures could spell the demise of the currency.
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