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August 2012

The Indian equity markets represented by the S&P CNX Nifty fell around 1% in July. The month was marked by increasing risk of the sovereign debt crisis in Europe as Spanish bond yields increased to its Euro-era high of 7.52% on news of its economy contracting in Q2CY12 and heightened concerns on the banking system. On the domestic front, the policy logjam continued. However, the FII flow strengthened and aggregated to Rs 10,300 cr as per SEBI (Rs 5,900 cr as per BSE) in the month. Corporate India started announcing the June-quarter ending results in July which was a mixed bag. 

The Reserve Bank of India (RBI), in its monetary policy review on July 31st, kept the repo rate, reverse repo rate, and marginal standing facility unchanged at 8%, 7% and 9% respectively maintaining its stand that lower interest rates cannot, in isolation, propel growth unless fiscal policy turns supportive. However, it cut SLR by 100 bps to 23%. The central bank raised its March 2013 Wholesale Price Index (WPI) inflation forecast to 7% from 6.5% projected in April 2012 and cut GDP growth forecast for FY13 to 6.5% from 7.3% projected earlier.

Most sectoral indices gave negative or flattish returns in July driven mainly by June quarter results. The IT index was the biggest loser with negative 7% returns. This decline was due to approximate12% m-o-m decline in index heavyweight Infosys on muted Q1FY13 results and downward revision of US$ growth guidance for FY13 from 8-10% to 5%.  Power index fell by 5% and capital goods index fell by 4% due to negative returns posted by BHEL on lower than expected results. The capital goods index was also impacted by decline in L&T despite good results, on concerns over growth given the slowing economy. Healthcare index posted the highest returns in the month of 4% driven by strong Q1FY13 performance of Lupin which has a 10% weightage in the index. 

The monsoons have been weak in the year and were at a deficit of 22% as on 25th July 2012 as per Indian Meteorological Department. The rainfall is expected to pick up in August and is expected to be at 96% of historical average, which will act as a positive trigger for the market. However, any further delay will severely reduce agricultural output in India which will impact food prices and hence inflation. Hence the pick-up of monsoons remains a key monitorable for next month.  The markets will also be driven by the June ending results that will be declared in August, developments in the Eurozone and policy actions by the Indian government.