Demonetisation Drama! Now the Government Says There Could Be 'Double Counting' in Deposits

Mon, 19 Dec Pre-Open

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After a 0.25% rate hike by the US Fed, global markets ended on a mixed note in the week gone by. While markets in the developed economies ended strong, the indices in the emerging economies fell on concerns of foreign investors pulling out money from these markets post the rate hike.

In its monetary policy, the US Federal Reserve raised interest rates by 25 basis points to 0.75% This the first hike since December 2015 and only the second one in the decade. The Federal Open Market Committee (FOMC) cited an improving economy and a strong outlook for the labour market as reasons for the hike. Going ahead, the US Federal Reserve has indicated a hawkish stance with respect to hike in interest rates. The FOMC, in an effort to progress towards its inflation goal, has projected three rate increases in 2017, putting the rate at 1.4% by the end of the year. It would then rise to 2.1% by the close of 2018. The Fed's aggressive tone sent the US dollar to 13-year highs. While the US market was up 0.4%, Japan was the biggest gainer, up by 2%, as a weak yen against the rising dollar makes the country's exports more competitive. Germany and France were the other gainers registering gains of over 1% for the past week.

Among the emerging economies, Brazil, China and Hong Kong were the biggest losers after the US Fed flagged a faster pace of interest rate increases than expected in 2017. Each of the markets registered a downfall of more than 3% last week.

Back home in India, market indices also bore the brunt of the rate hike as the ongoing demonetisation drive continues to weigh on demand and financial performance of companies. The index was down by 1% in the week gone by.

Key World Markets During the Week

On the sectoral indices front, barring IT stocks, all the major indices closed on a negative note. Metal (down 4.4%) and Telecom (down 3.7%) were the biggest losers for the week.

BSE Indices During the Week

Now let us discuss some key economic and industry developments during the week gone by.

A cash shortage on account of the demonetisation drive manifested itself in the form of a forced slowdown in demand pulling down inflation. The Wholesale Price Index (WPI) data released by the Central Statistics Office (CSO) showed the annual wholesale inflation declining for the third consecutive month to 3.2% in November. The corresponding figure for October stood at 3.4%.

The fall in the WPI can also be attributed to the fall in food inflation. Food articles, which have a weight of 14% in WPI, declined to 1.5% in November. This was seen as against 2.6% in October and 5.6% on a YoY basis.

While inflation for primary articles fell in November, fuel and power and manufactured products group inflation continued to rise during the month. Manufactured products inflation, having a weight of 65%, rose to 3.2% in November as compared to a contraction of 1.4% in the same month last year. Similarly, inflation for fuel and power stood at 7.9% in November as compared to a steep contraction of 11% in November last year.

Along with the WPI, the Consumer Price Index (CPI) also fell to a two-year low during the month of November.

Demonetisation alone is not helping the low inflation numbers. As we stated in one our recent editions of The 5 Minute WrapUp...

• 'The expected fall in the inflation will be on account of three key reasons. First, the favorable base effect. Second, the harvest hitting the market. And last, the impact of the demonetisation which is mainly hitting the prices of the perishable commodities like fruits and vegetables.'

According to data released by the government, India's merchandise exports grew for the third consecutive month in November this year. However higher imports owing to gold purchases have pushed the trade deficit to 2 year high of US$13 billion. Part of the gold imports could also have been due to the demonetisation with various reports showing high gold purchases to absorb the cancelled currency.

In November, exports of engineering products rose by 14.1% YoY, while those of petroleum and chemicals rose by 5.7% YoY and 8.3% YoY respectively. The exports in November added US$20 billion as compared to US$19.5 billion in the year-ago period. However, it was lower than the US$23.5 billion recorded in October, indicating that demonetization may have hurt shipments.

Imports for the same period stood at US$33 billion. Gold imports were up 23% YoY and stood at US$4.3 billion. Exporters body FIEO remains wary about the growth in exports saying that although growth is encouraging, uncertain global conditions remain a challenge.

As per an article in The Economic Times, India's fuel demand surged 12.1% in November on the back of high petrol and diesel sales following demonetisation. One must note that post banning old 500 and 1,000 rupee notes on November 8, the government allowed their use for paying for auto and cooking fuels for almost a month.

Subsequently, this has boosted India's imports of the industrial and transport fuel. Reportedly, petroleum product consumption rose to 16.6 million tonnes in November, up from 14.8 million tonnes in the same month a year back. India is taking over from China as the driver of global oil demand growth as its economy expands, boosting the use of diesel in vehicles.

One must note that India today imports around 70% of the oil that it consumes. Thus, it goes without saying that in the longer term, India needs to focus on becoming self-reliant as far as its energy needs are concerned.

Foreign funds pulled money from Indian stocks at the fastest pace since 2008. Surprisingly, it is the debt instruments that are taking the biggest hit, after remaining a preferred investment avenue for foreign funds in recent years, even as equities continue to attract net inflows. But, this is still not enough to compensate the huge outflows from the bond market during the year gone by.

The net outflow by (foreign portfolio investment) FPIs in the debt market is already more than US$ 6.2 billion (nearly Rs 43,000 crore) this year with a few days of trading left, which far exceeds the net inflow of less than Rs 30,000 crore (US$ 4.3 billion) into the equity market.

The inflationary tendencies on the back of rising bond yields in the developed world bond market coupled with a resilient recovery in crude have led to profit booking.

Dollar strength and expectations of rate hike by the US Federal Reserve, the surprising US presidential outcome and the demonetisation drive, which created domestic cash crunch, sparked intense selling pressure in the capital markets.

Movers and Shakers During the Week

Company	9-Dec-16	16-Dec-16	Change	52-wk High/Low
Top Gainers During the Week (BSE Group A)
Gitanjali Gems	60	65	8.8%	94/30
Mphasis Ltd	517	562	8.7%	622/404
Oberoi Realty	305	329	7.6%	378/210
Future Enterprises	16	17	5.1%	158/14
Indraprastha Gas	869	913	5.1%	921/484
Top Losers During the Week (BSE Group A)
Ultratech Cement	3576	3178	-11.1%	4130/2581
Muthoot Finance	303	270	-11.0%	405/170
Jaiprakash Power	4	4	-10.9%	4-Aug
Lanco Infratech	4	4	-9.5%	3-Aug
Unitech	5	4	-8.8%	3-Sep

Source : Equitymaster

Some of the key corporate developments in the week gone by.

Bharat Heavy Electricals Ltd (BHEL) has bagged a major order from Indian Railways for supply of IGBT-based traction converters. The order is for the supply of 118 sets of IGBT-based Traction Converters for 3 Phase 6,000 HP Electric Locomotives from the Railways.

Reportedly, the order is valued at Rs 2000 million and has been placed on BHEL by Chittaranjan Locomotive Works (CLW). The traction converters will be manufactured and supplied by BHEL's Electronics Division in Bengaluru. However, BHEL has already supplied 225 such IGBT-based Traction Converters, which are under operation with Indian Railways.

Notably, the company has emerged as a reliable partner for the Railways through its long-term association. Moreover, in the transportation sector, BHEL manufactures a wide range of traction propulsion equipment at its Bhopal, Jhansi and Bengaluru plants.

Sun Pharma continued to struggle with regulatory pressures. The US Food and Drug Administration (USFDA) has again raised concerns about the quality control process at Sun Pharmaceutical Industries' Halol factory.

The USFDA had inspected Halol unit from November 17 to December 1, 2016 and issued a Form-483 citing nine inspectional observations. The violations listed by the USFDA include problems related with quality control system. Moreover, lack of proper maintenance of important records related to the manufacturing process and concerns about the accuracy of some of the drug testing methods employed were the other deficiencies pointed out. Other findings included delays in informing the agency of contamination or failure of drug batches.

Notably, the approval of several of Sun Pharma's key drugs in the United States, depends on clearance of the Halol plant. In this regard, the company has been working on improving processes at Halol since the USFDA warned it a year ago of concerns with the manufacturing process at the site.

Further, the Halol plant has been under regulatory scanner since September 2014. Subsequently, no new product approvals have been granted from the plant. Remediation measures undertaken to restore compliance also hit supplies from the plant impacting the overall sales.

Meanwhile to boost its ophthalmic pipeline, the company has concluded all the necessary formalities with regards to acquisition of 100% equity stake of Ocular Technologies, Sarl. Ocular is a portfolio company of Auven, an international private equity company focused on accelerated development of breakthrough therapeutic drugs.

Under the deal, Sun Pharma will pay Auven US$40 million upfront, plus contingent development milestones and sales milestones as well as tiered royalty on sales of Ocular's eye disease treatment drug Seciera.

Reportedly, Seciera is currently in a Phase-3 confirmatory clinical trial for the treatment of an inflammatory eye disease affecting approximately 16 million people in the US alone. The key thing to watch out for is whether this acquisition coupled with existing pipeline consisting of BromSite, DexaSite and Xelpros will enable Sun Pharma to significantly expand its ophthalmic presence and reach patients globally (Subscription Required).

Infosys has made an investment from its US$500-million Innovation Fund in IdeaForge, an Indian startup focused on Unmanned Aerial Vehicle (UAV) solutions. IdeaForge has built a world-class UAV solution featuring fully autonomous operation, cutting edge fail-safe technology, high endurance, image intelligence with live feed and support for complex payloads such as thermal and high-resolution imagery.

IdeaForge's UAVs have been widely deployed by the Indian Armed Forces for surveillance, crowd monitoring and rescue operations, and offer a compelling solution for commercial applications in verticals such as energy, utilities, telecom and agriculture.

The Innovation fund operates like a venture capital firm and backs startups working in domains relevant to Infosys's core business. The fund would also in companies that develop innovative technologies on automation, Internet of Things (IoT) and artificial intelligence (AI).

NTPC Ltd is entering the wind power segment with a 50-MW project in the state of Gujarat. In this regard, Inox Wind Ltd has received a turnkey order from NTPC for the supply and installation of 25 units of its 2-MW generators. The company expects to commission the wind farm by the first quarter of FY18.

The move is a part of the company's target of sourcing about 11% of its planned capacity of 128 GW by 2032 from renewable energy. NTPC currently has roughly 47 GW of operational power plants, including several solar assets totalling 360 MW. It, however, had so far not initiated any wind projects and this scheme in Gujarat is its first one, the reports noted.

NTPC is reportedly planning to invest Rs 26.48 billion for development of three coal blocks in Odisha. The company will invest Rs 6.84 billion in the Dulanga coal block, which is linked to its Dariplalli super thermal power project that has the capacity to generate 1,600 Mw of power. The power project, which is supposed to come up in Sundargarh district, will attract an investment of Rs 125.32 billion from NTPC.

Apart from the Dulanga coal block, NTPC was also allocated the Mandakini-B coal block last year to help fuel its first 4,000-Mw power plant in Telangana. The Mandakini block will receive an investment worth Rs 15 billion.

In the same year, the firm entered into a joint venture (JV) with the Jammu and Kashmir State Power Development Corporation (JKSPDCL) to form a JV company for mining at the Kudanali-Luburi coal block, where Rs 5 billion will be invested for development purposes.

Going ahead, emerging markets are expected to remain volatile in the aftermath of the rate hike and possibility of further hikes in 2017. Apart from this, the oncoming earnings season will set the tone for the Indian markets. However, with demand expected to remain muted for the next few months, corporate earnings performance are unlikely to recover in the immediate future. But instead of getting bogged down by the economic weakness, subscribers should utilise the opportunity to cherry-pick fundamentally sound stocks trading at attractive valuations.

And here's an update from our friends at Daily Profit Hunter...

It was a dull week for the markets. The Nifty opened with a downward gap on Monday and traded choppily around the dotted line the rest of the week. Most of the stocks also traded on lackluster note. The index ended the week down 1.5% to 8140. Going forward, it seems the index will trade in a broad range of 8,000 to 8,300 the rest of the year as volumes have remained on the lower side this week. Momentum is also neutral, indicating limited strength in either direction. You can read the detailed market update here...

Nifty Logs Around 1.5% Losses

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