On Strong FII Inflow

It seems that the Indian equity markets are defying all the rules of gravity to make a new all time high at every trading session. It is the strong FII inflows and the positive sentiments ahead of the general election which is taking the markets to new highs To put the figures in perspective, on YTD basis the FIIs are net buyers to the tune of Rs 22204.50 crore and chunk of that (Rs 20085 Crore) has arrived only in the month of March 2014. The noticeable factor here is that the Indian markets have managed to attract strong inflows despite the continuance of QR taper.

While the FII inflow is one factor that helped the indices to sustain at higher levels, it has also helped the Indian economy on other macro parameters as well. The most important amongst all this is the appreciation of INR against the USD. INR which had hit the all time low (breaching the mark of Rs 68 per USD) in the month of September 2013 is now fast recovering to trade at around Rs 60 -60.50 per USD. Another factor is the improvement in Current Account Deficit (CAD). The CAD now remains only 2 per cent of the GDP, which indicates a sharp improvement.

While the FII inflow is one factor that helped the indices to sustain at higher levels, it has also helped the Indian economy on other macro parameters as well. The most important amongst all this is the appreciation of INR against the USD. INR which had hit the all time low (breaching the mark of `68 per USD) in the month of September 2013 is now fast recovering to trade at around `60 -60.50 per USD. Another factor is the improvement in Current Account Deficit (CAD). The CAD now remains only 2 per cent of the GDP, which indicates a sharp improvement.

The preceding fortnight also witnessed the monetary policy announcement (start of first bi-monthly monetary policy). The policy was announced on 1st April, 2014, where the Governor did what was expected on Dalal Street. He kept the repo rate unchanged at 8 per cent and kept the CRR at 4 per cent. However what he did was, he increased the liquidity under the 7-day and 14-day term repos.

if we take a look at the policy, it was completely data driven with IIP continuing to be sluggish and inflation steadily moving towards the tolerance levels of RBI. But the Governor also mentioned about the possible impact of El Nino and its impact on the food prices. We had also mentioned about the possible expansion in inflation on account of un-seasonal rains. The positive aspect here is, we feel that RBI is quite comfortable with the inflation and may not hike the repo rates in near term.

The policy also cleared some air on the Banking licenses front. The Governor categorically stated that it is regulatory process and not a government or political one. Rather, he was quite positive on providing the Bank licenses on regular basis.

While this was the scenario on the domestic front, on the global front also the indices kept the momentum alive. However the Chinese manufacturing data spooked Shanghai, resulting in underperformance of the Shanghai Composite Index as against the peers.

As about the expectations, we expect the markets to remain buoyant as the FIIs would keep pouring in money in the Indian markets. The reason is quite simple; India is a good house in bad neighbourhood. Further it is a start of a quarterly results season for the March 2014 quarter results. With improvement on the macro front, we are also expecting some positivity in the quarterly results also. Apart from that the elections DS would keep the markets upbeat.