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July 2013

Indian equity benchmarks CNX Nifty and S&P BSE Sensex closed down 2.40% and 1.84%, respectively in June 2013. The decline was primarily due to discouraging cues from the international and domestic markets. Weak international cues came after the US Federal Reserve Chairman Ben Bernanke said that the central bank will start scaling back its stimulus measures later this year if the economic recovery is sustained. The comment resulted in a massive sell-off across the globe, including India, on worries that it could dry out the liquidity in the global financial system. The Indian market faced further pressure after the US Fed’s comments dragged the rupee to an all-time low against the dollar, which raised fears about a jump in inflation and current account deficit (CAD), delays in policy rate cuts and possible foreign fund outflows. The rupee breached the psychological level of 60 against the dollar, reaching an all-time low of Rs 60.71 per US dollar (USD) on June 26, 2013. Selling by Foreign Institutional Investors (FIIs) and weak domestic indicators, including April 2013 industrial output growing at lower than expected 2.3% compared to 2.5% in March 2013, also pulled down the market. RBI, in its mid-quarter monetary policy review on June 17, 2013, maintained the repo rate at 7.25% and the cash reserve ratio (CRR) at 4%. Though inflation has moderated, rupee depreciation and increase in administered prices limited the room for any further policy rate cuts by the central bank. FIIs sold equities worth Rs 10,530 cr in June 2013 (till June 27) compared to buying of Rs 20,678 cr in May, 2013.

Losses were, however, capped later in the month due to recovery in the rupee and the government’s decision to double the price of natural gas from the next fiscal year. Positive economic data such as fall in India's headline wholesale price index (WPI) inflation rate to a 43-month low of 4.70% in May 2013 and India’s CAD narrowing down to 3.6% of the country’s gross domestic product (GDP) in January-March 2013 compared to record high of 6.7% in the previous quarter also cheered the market. Buying by domestic institutional investors (DIIs) in equities to the tune of Rs 9,248 cr in June 2013 also augured well for the local stock market; DIIs were net sellers to the tune of Rs 12,052 cr in May 2013.

*Note: FII data is available only till June 27 

Most BSE sectoral indices closed lower in June except for S&P BSE IT and S&P BSE Oil & Gas.  The S&P BSE IT index emerged as the topmost gainer, rising 3.13% due to weakness in the rupee (as export-oriented sectors benefit from the weakness). The S&P BSE Oil & Gas index followed, gaining 2.84%, as the government decided to hike the price of natural gas from the next fiscal year. The S&P BSE Consumer Durables index was the biggest loser, down 20.28%, on profit booking. The S&P BSE Realty fell sharply to 10.32% amid worries that the scale back of stimulus measures by the US Fed could add more pressure on the rupee, thereby delaying rate cuts from the Reserve Bank of India (RBI). 

The markets in July are expected to be guided by developments on monsoons, FII flows and on the country’s macro-economic situation. In this regard, policy reforms by the Indian Government could act as triggers.