With the benchmark indices CNX Nifty and S&P BSE Sensex surging 4.82% and 4.08% in September the Indian equity market was able to halt its three-month slide. The indices recovered largely due to positive domestic and global cues. Strengthening of the rupee against the dollar due to RBI actions also helped the domestic market. Measures announced by the new RBI Governor, Raghuram Rajan included: 1) new banking licenses likely to be declared around January 2014, 2) a fixed-rate swap for FCNR (B) deposits (which are dollar-denominated deposits for expat Indians), 3) to reduce the pre-emption of deposits via the statutory liquidity ratio or SLR, 4) increasing the current overseas borrowing limit for banks from 50% of the unimpaired Tier I capital to 100%, 5) to launch Inflation Indexed Savings Certificates linked to the CPI New Index, 6) form a new committee to suggest reform of financial inclusion targets for banks and 7) address the non-performing loans (NPL) situation and a promise to review debt recovery processes. Strong buying by the foreign institutional investors (FIIs) also aided the markets. FIIs were net buyers of Indian equities in September after selling for the previous three months. FIIs net bought Rs 12,633 cr in September compared to selling of Rs 6,200 cr in August.
Of the global cues, the US Federal Reserve’s (Fed’s) decision to continue with its bond buying program boosted the Indian market. The US central bank said that while the US economy appears to be improving it will “await more evidence that progress will be sustained" before deciding to reduce the bond purchases. Upbeat economic data from China and easing concerns over a likely US-led military strike in Syria also propped up the indices.
Gains were however capped on disappointing inflation data; inflation rate, based on the wholesale price index (WPI), rose to a six-month high of 6.10% in August from 5.79% a month ago mainly on account of a sharp increase in prices of food articles. India's current account deficit also widened to $21.8 bn, or 4.9% of GDP, in the June quarter from $18.2 bn in the previous quarter. RBI’s unexpected hiking of the repo rate by 25 basis points to 7.5% in its mid-quarter monetary policy review also dragged down the market. Though the RBI reduced the marginal standing facility (MSF) rate and minimum daily maintenance of the cash reserve ratio (CRR) at its policy review, the measures failed to cheer the market. Persistent worries about a possible US government shutdown also dented sentiments. Markets also reacted negatively after the Prime Minister's economic panel said it would be a challenge for the government to meet its fiscal deficit target in the current year.
All the S&P BSE sectoral indices, except S&P BSE IT and S&P BSE Realty, ended higher in September. The S&P BSE Power index was the top performer, up 9.82%. The S&P BSE Capital Goods rose 8.77% as most capital goods stocks gained after data showed that the sector grew 15.6% y-o-y in July, lifting the overall industrial output to a four-month high of 2.6%. S&P BSE FMCG Index added 7.82% as investors preferred to take defensive bets. S&P BSE Metal index advanced 7.53% following encouraging economic data from China, which indicated an increase in demand for the sector. Among the laggards, S&P BSE IT Index fell 2.35% as the export-oriented sector was affected by the rupee appreciation; it was followed by S&P BSE Realty Index which fell to 0.28% as the interest-rate sensitive sector was affected by the repo rate hike by the RBI.
The markets in October would be guided by FII flows, policy actions by the RBI, domestic macroeconomic data and global cues. September-ending quarter results, which will be declared over October-November, are expected to be tepid and would influence the markets. The decision on raising the US’s debt ceiling is likely to be taken by mid-October and is also expected to impact the markets. Policy reforms by the government to revive economic growth would encourage FIIs and act as an upside trigger.