The current calendar year has seen trading for almost seven months and the SENSEX has moved from its opening levels of 19,426.71 points to Friday’s close of 20,149.85 points. The gain is 723.14 points or 3.72%. Similar levels for the Nifty are 5,905.10 which is now 6,029.20 points or a gain of 124.10 points or 2.10%. Looking at these numbers it appears a fairly quiet progress and merely inching forward. The realty is completely different. Markets have been super volatile and behave differently almost every day. To give an example of volatility the markets in the current July series are up 6%. The significant highs and the lows of the year have seen the markets touch a level of 20,203 in January, a low of 18,144 in April, 20,443 in May and 18,467 in June. Well this volatility is great for traders but hurts investors and they have been avoiding the markets.
The volatility is not enough, it’s the value of stocks that the average investor (retail) investor owns and holds. The BSEMIDCAP and BSESMALLCAP indices have been negative for the calendar year 2013 and in a big way. While the BSEMIDCAP began the year at a level of 7,112.89 points, its current level is 5,993.46 points or a loss of 1,119.43 points or 15.73%. The BSESMALLCAP began the year at a level of 7,379.94 points and is currently at 5,706.48 points, a loss of 1,673.46 points or 22.67%. Very clearly the wealth destruction is there which prompts the investor to shun the markets.
The Indian Rupee has become super volatile and has depreciated quite sharply in the last few months. The opening level of the rupee for 2013 was Rs 55.20 which appreciated to Rs 53.41 in February and continued to hover in the 53.50-55.50 range till April when it closed at Rs 53.94. In May it cracked to a low of Rs 57.05, Rs 60.76 in June and a low of 61.54 in July. RBI intervention has brought the rupee value back below the “Senior” level and the Friday close was Rs 59.35. If one looks at the rupee in the almost seven month period the net depreciation has been Rs 4.15 or 7.51%. To add to our woes is the penchant to invest in gold and while international prices have fallen quite sharply from $1664 to $ 1283 in the current year. In India prices have fallen in the same period from Rs 30,490 to Rs 26,650. The international fall is $ 381 or 22.89% while the Indian fall is a mere Rs 3,840 or 12.59%. The difference is primarily on two accounts with the first being an import duty on gold of 9% being levied currently and second the rupee depreciation of almost 8%. Gold imports have slowed down but with the differential gold duty there is smuggling which has begun in a much larger way.
I believe the depreciation of the rupee has probably happened in a manner which was least expected. FII’s are allowed to invest in debt and there are limits for the same. Second to prevent hot money from coming into debt instruments, there is a withholding tax of 20% on the interest earned. The government increased the limits of FII investment 5 fold and reduced the withholding tax of 20% to one fourth at a mere 5%. There was a huge inflow of money into the debt market and in the first months of calendar year 2013, there was a net inflow of Rs 31,143 crs into India into the debt market. With the rupee depreciating, the yield differential reducing, FII’s dumped debt and just began liquidating. In just one single month June 2013, there was an outflow of Rs 31,584 crs. Though the outflows have reduced there still is an outflow of Rs fall10,954 crs in the current month as well. What is even more disturbing is the fact that though the pace of selling has reduced, FII’s have been net buyers of debt on just one day in July so far.
Our economy seems to be going nowhere and the turnaround is somehow still not visible. While it is politically correct to say that the worst is behind us statistical data at the end of every month makes us go horribly wrong every month. The saving grace is the monsoon which appears to be on track and is doing real good for agriculture. The bigger gain would be the Rabi season which begins sometime in October-November and is not rain fed but depends on soil water and irrigation. Water levels have improved in the country and augur well. As they say in hindi “Bhagwan jab deta hain to chappad phad kar deta hain”. When God gives he gives in plenty even after tearing your roof.
What should one expect from the markets going forward? Well the nation is gearing to elections scheduled to be held in April-May 2014, but which may be preponed to coincide with state elections to be held in 4 or 5 states in the winter of 2013. Our markets should begin to rally strongly once poll announcements are made. Until then we would live dangerously, defying fundamentals and trying to overcome extreme volatility and a sharply depreciating rupee.
