Well begun is half won

Oct 10, 2016, 10:24 IST | Arun Kejriwal

The repo rate cut is rousing news but banks have to understand that rate cuts need to be passed on

From left, Algeria’s Bank Governor Mohamed Loukal, Federal Reserve Chair Janet Yellen and India Finance Minister Arun Jaitley during the International Monetary and Financial Committee (IMFC) conference at World Bank/IMF Annual Meetings at IMF headquarters in Washington. Pic/AP/PTIFrom left, Algeria’s Bank Governor Mohamed Loukal, Federal Reserve Chair Janet Yellen and India Finance Minister Arun Jaitley during the International Monetary and Financial Committee (IMFC) conference at World Bank/IMF Annual Meetings at IMF headquarters in Washington. Pic/AP/PTI

Markets opened on a strong note on Monday, as if we were starting a new rally and it continued on Tuesday, after a repo rate cut by Reserve Bank of India Governor Urjit Patel, addressing his first meeting after taking over.

The first Monetary Policy Committee (MPC) meeting preceded the policy review. The repo rate cut was unanimous with all six members in favour of the same. The first two days saw the BSESENSEX rally by over 450 points, but profit taking thereafter reduced the weekly gains to 195.18 points or 0.70 per cent. NIFTY gained 86.45 points or 1 per cent to close at 8,697.60 points. The broader indices saw the BSE100, BSE200 and BSE500 gain 1.41 per cent, 1.61 per cent and 1.77 per cent respectively. The action continues in the midcap and smallcap space which saw the BSEMIDCAP gain 2.86 per cent and BSESMALLCAP 3.46 per cent. The BSEMIDCAP is currently trading at lifetime highs while BSESMALLCAP is trading at multi-year highs.

Talk the stock
The top sectoral gainer was BSEOIL&GAS up 6.18 per cent, followed by BSEMETAL 5.07 per cent, BSEREALTY 4.05 per cent and BSEPSU 3.72 per cent. The losers were led by BSEIT down 1.43 per cent and BSETECK 0.58 per cent. In individual stocks, the top gainer was Vedanta up 13.22 per cent followed by Cairn India 11.49 per cent, NMDC 11.12 per cent, GAIL 10.73 per cent and Indian Oil 10 per cent. The losers were led by TCS 2.43 per cent followed by Infosys 2.41 per cent and M&M 2.28 per cent. The Indian Rupee lost 7 paisa or 0.11 per cent to close at R 67.66 to the US Dollar. Dow Jones lost 67.66 points or 0.37 per cent to close at 18,240.49 points.

Pass them on
Some banks have cut lending rates by 10 basis points against the repo rate cut of 25 basis points, to be seen on the right side of the new Governor. Though it is not enough on the part of banks, at least a beginning has been made.

One hopes that banks realise that rate cuts are meant to be passed on and not retained to improve their own balance sheets. The primary markets saw the listing of HPL Electric and Power Limited which was weak and saw the share lose R24.10 or 11.93 per cent for the week. The issue was oversubscribed 8.06 times overall with QIB 5.77, HNI 22.20 and retail 3.31. All those investors who, as a policy, do not sell in loss our currently stuck in this counter and would have to wait for some time before an exit would be available.

Eye on issues
The issue from Endurance Technologies received excellent response and was subscribed 43.84 times. The issue saw QIB’s subscribe 53.43 times, HNI 127.07 and Retail 2.69. The retail portion was certainly subdued and the performance of the last few issues is responsible for the same. The fact that retail by and large, do not sell in discount or loss, they have been left holding on to shares of the two/three last issues which have listed and are reading below their issue prices. This would also serve as a wakeup call to merchant bankers that they need to price issues a little less aggressively and leave something on the table for investors.

Markets have been on an uptrend over the last seven months, and the ongoing rally seems to have run its course. Results season would begin in the current week and IT major Infosys, is set to declare its results on Friday. The sector in general and the company in particular, is underperforming the benchmark indices and probably on expectation of missing some guidelines the share lost ground last week. The IT and tech indices were the only losers signifying the weakness in this space. The markets need to consolidate and digest the upcoming results before a new rally may begin.

Post result look
One also needs to note that valuations are no longer cheap and there can be no justification for the present P E multiples. Not much is expected from the quarterly results, which would justify the valuations either.

It therefore, makes good sense to reduce exposure and take a fresh look after the results. Tuesday and Wednesday are religious holidays. Markets are closed on these days too.

A midweek two-day break would reduce volumes and make trading that much more difficult and volatile. For all effective purposes, the markets could see an extremely volatile Thursday when markets open after a two-day break and some quarterly results.

Global markets though would be open on these two days. Take money off the table, and wait for results, and the realignment of valuations post these results.

Arun Kejriwal is founder of the Mumbai-based advisory firm Kejriwal Research & Investment Services Pvt Ltd. Readers are invited to read more about these and other issues on his website http://ak57.in

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