The equity markets represented by the S&P CNX Nifty ended the year with negative 25% returns y-o-y plagued by poor global macro conditions and concerns over slowdown and lack of policies in the domestic market. While the markets started the month of December on a positive note driven by hopes of resolution of the European debt crisis, the negative sentiments took over by the end of the month and it posted a decline of 4.3% due to (a) concerns over Indian Government’s inability to implement policy reforms after Cabinet’s decision to allow FDI in retail was put on hold, (b) lowering of the GDP forecast for the fiscal to 7.5% from 9% mainly on account of the industrial sector, (c) weakening global economic conditions, and (d) Inability of the government to stablise the domestic economy. Global markets gave mixed returns in the month. FIIs remained net sellers in the month to the tune of Rs 24 bn. The rupee continued its downside against the dollar and depreciated by 1.6% in December. It depreciated by over 15% in the year and was the worst performing Asian currency. India’s fiscal deficit touched $66.3 bn in the first eight months of FY12, the highest in the last three years and around 86% of full year target, due to increase in prices of imported commodities driven by rupee depreciation. The government indicated that it will miss the target of 4.6% for fiscal deficit for FY12 due to weak rupee inflating country’s oil import bill, moderating domestic economy and uncertain global environment.
RBI announced its mid quarter review of the monetary policy and left its main lending rate unchanged as inflation shows signs of cooling. It also refrained from cutting the cash reserve ratio (CRR) despite tight liquidity in the system. The repo rate was left unchanged at 8.5% after increasing it 13 times since March 2010. The bank rate also remains static at 6%.
Most sectoral indices posted negative returns except Information Technology (IT). IT posted returns of 4.6% driven by positive economic data in the US and decision of central banks to provide cheaper dollar funding to ease the liquidity crunch for European banks. BSE capital goods was the worst performer of the month following the news of decline in capital goods production by 25.5% y-o-y in October 2011. The index also fell on worries that new order flows will be hit adversely in a slowing economy. Interest rate sensitive sector realty and banking declined by 16.6% and 7.1% respectively, as RBI kept CRR and short-term lending rate steady in the mid quarter review of the monetary policy. BSE Metals declined by 9.1% on worries that global economic slowdown could hurt demand for industrial metals.
Corporate profitability is likely to remain depressed in the near future given the higher input costs, wages, interest rates, steep depreciation in currency and higher competitive intensity. Q3 FY12 results expected from mid-January onwards. Companies expected to report decline in margins and profitability due to slower volume growth and cost pressure. Companies with substantial debt will be further hurt by rising interest costs and marked-to-market losses on foreign debt and derivatives due to rupee depreciation. However, industries like IT services, bulk drug exporters, pharmaceutical companies etc. are expected to benefit from rupee depreciation.
We expect the Indian markets to be driven by corporate earnings in the next month while they’ll also continue to be influenced by the global cues. On the domestic front, movement of rupee against dollar, industrial growth and inflation remain key monitorables.