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OP Thomas: Strengthening of rupee, Infosys results boost Indian stocks
October 14, 2013
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Exclusive to The Gulf Today

Indian equities gained for the second consecutive week. The indices were up over 3 per cent and the rupee gained grounds, the latter giving some hopes that demand for rupee has picked up some lost ground.

A couple of reasons for the markets to go up were the increased money flow at the short end after the Reserve Bank of India (RBI) eased near term rates and the IT major, Infosys, quarterly performance that beat market expectations. Auto stocks were also upbeat based on increased sales.

Foreign institutional investors have increased their exposure in equities and have been net buyers so far. For the first ten days of the current month, the net purchased equities worth Rs37.55 billion worth of equities. However, in the same period of the previous month, FIIs net equity purchases were higher at Rs49.68 billion. The encouraging development is they have turned net purchasers of bonds after being net sellers for three consecutive months, June through August of this year.

Another noteworthy point is FIIs have been net sellers of bonds, largely on account of firming interest rates. In fact, it is a good time to pick up 10-year government bonds, yields at current prices are hovering around 8.4 per cent, because prices have fallen sharply on institutional selling. Retail investors stand to gain the benefit of low bond prices emerging out of high rate outlook which in turn, offer higher yields in the secondary market. This means, government bonds are cheaper now in the secondary market and one could take a position to hedge against higher rate or softer rates. It means a retail investor can gain from capital appreciation of bonds if domestic interest rates stabilise or soften and at the same time stand protected against higher inflation or if rates remain at current levels or rises.

Coming back to the events of last week, late Friday, the data on the Index for Industrial Production came in at a dismal 0.6 per cent in August as against the previous month’s 2.6 per cent. This indicates the slowing economy has made no headway in terms of bottoming out. The data said manufacturing and capital goods contracted and most now fear the failure of the government in achieving the estimated growth rate of five per cent. The IMF has reduced its outlook to 3.75 per cent. Would India then stand to lose out in the emerging economy with a downgrade?

Manufacturing sector, which constitutes over 75 per cent of the industrial production, grew a mere 0.1 per cent YoY last month and capital goods contracted two per cent YoY.

Yet, the BSE Sensex surged 612.64 points to 20, 0528.59 week on week, showing a 3.08 per cent spurt. The NSE Nifty on the other hand, gained 3.2 per cent or 189 points to 6,096.

The levels indicate that the markets haven’t yet discounted the IIP figures and it looks like Nifty could hit 6200 levels before showing a declining trend. Nifty is currently seen strongly supported at 5,800 levels. As has been the trend before quarterly results, the markets tend to discount future earnings. So do not get carried away if indices surge as levels above 6,200 would likely not sustain on institutional profit-taking.

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The author is a business analyst covering
Indian markets, banking and economy

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