See no comfort in FM's statements on CAD: Udayan

Wednesday went without any event from the US Federal Reserve which was along expected lines say CNBC-TV18’s Udayan Mukherjee. The statement didn’t have any change in commentary leading to the US market brushing it off completely. Global markets were stable today morning.

Though we saw a bit of a pullback yesterday from the lows of the session, but generally, it has been a very weakish kind of trough for both the Indian stock market and the currency market.
Mukherjee adds that the interest subvention of Rs 1000 crore announced for Indian exports will not provide any kick to the Indian economy. Despite finance minister's confidence on combating the current account deficit (CAD) issue, the situation is far from being comforting. Below is the edited transcript of Mukherjee's analysis of the market. On Fed's effect on Nifty
Maybe the market will have a mild sigh of relief now that Quantitative Easing (QE) tapering will not take place in September. However, it still remains on the table, so I do not think he changed his commentary much.
The surest sign of it being a non-event is what happened to the US bond yield. It was 2.6 percent yesterday, it is 2.6 percent today. So, the US bond market which is most sensitive to commentary from Ben Bernanke just treated it like it is, which is a complete non-event. The tapering could happen in September, October, November, but I do not think that is tough to be rejoicing about out here. If one just asks himself a simple question, when the QE was in full flow in June and July, what happened to EM inflows into India? We got nothing. We got lot of outflows in both equities and bonds at a time when QE was in full flow. So, even if we get another extra month of QE is out there in the west, why should we start rejoicing that we will be the beneficiary of large inflows.
I think QE withdrawal is bad per se, because it constricts an already shrinking universe. However, QE staying is not helping us as is clearly visible from the evidence of the last couple of months. So, I think it is a non-event and one should not read too much into it. We have to resolve our own problems instead of just keep hoping that because of QE we will get bailed out of the serious mess that we have driven ourselves into. On Finance Minster's statements on CAD
I do not see any lingering impact of the FM’s statements on the economy. It didn’t have any impact in any of the markets to begin with. In the last couple of months, every fifteen days the pink paper headline said ‘FM unleashes reforms’ or ‘FM promises reforms to haul back the rupee,’ but what reforms are we talking about?
The FM is still playing that test match, he comes and sits in front of the media every 10 days and says that things are being considered. We have a plan and we are considering and many good things will happen.
Right now, what are we doing is an apology- Rs 1,000 crore more for an interest rate subvention which will galvanized Indian exports. What are we talking about out here, is this what the kick that Indian exports need, Rs 1,000 crore more of subvention? I am quite sure that the FM will tinker with some customs duties on imports as well. At the next meeting something incremental will get announced but that is not going to solve our problem.
I heard him say yesterday that even if the current account deficit (CAD) is USD 80 billion, a combination of foreign institutional investors (FIIs) plus foreign direct investments (FDIs) plus European Central Bank (ECB) will comfortably finance that CAD, the numbers are not adding up in my book and neither in the forex markets book, which is why the currency is where it is.
How much we have got in terms of FII flows, equity plus debt this year in seven months? It is USD 9 billion. That is the reality and one cannot even extrapolate that because the last couple of months have been outflows, so the near-term trend is down not up. This USD 9 billion includes a lot of flows, which came in, in Q1 of the year.
Right now, that trend is not USD 9 billion in seven months. In terms of FDI, Q1 was USD 5 billion and I think Q2 might have even been less or something to that. You extrapolate that in the first six months of the year, we probably got something in the vicinity of USD 10 billion in FII inflows, USD 11 billion. That plus FIIs is USD 20 billion, so you have got one quarter’s run rate on that USD 80 billion hole in seven months.
Five months are left of the year, I don’t see how magically in a scenario where global liquidity is probably going to shrink in Q4 of the year, we will magically get USD 60 billion of FII plus FDI and whatever else route he is discussing to breach that USD 80 billion hole. So yes, he has done a good job with the fiscal deficit but that he did with what is in his control, which is cutting plan expenditure and reducing fuel subsidies.
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The FM can be wishful on bridging of the CAD, but it is not in his control. So, I don’t think the market or media should get excited about the fact that the FM said USD 80 billion will come. The FM does not have USD 60 billion to bring in. He can hope that foreigners will bring it in but he does not know for sure. So, I think the market needs to be little careful before it gets carried away with what the finance minister is trying to say to talk up the rupee.
The market has probably seen through talk up statements from the FM and if he could do something, he should do it right now because the RBI’s moves are not helping. So, instead of just prolonging this agony by saying, ‘I am going to think about things around the table and I am reflecting on it and pontificating on it’, I think one should now start doing more stuff rather than talking because talking is not helping as the market is doing its own number. Yesterday the rupee hit more than 61/USD once again, so I think the time for talk went away long back but somehow that penny does not seem to have dropped in New Delhi.

Nifty did the expected thing yesterday. A level of 5,700 represents the first level of strong support. So it went there, breached that in the morning and then came back in the second half of the day primarily because it got very oversold. After six days of a relentless fall, the Bank Nifty had got absolutely crushed, not that it pulled back a lot yesterday but so many sectors and stocks had lost such a lot of value that a bit of a technical rebound had to happen and that happened.
Infact, it happened in many of the beaten midcaps as well, not all of them though. Anything which was high beta was still very bad but if one looks at the midcaps from the low of the day, at one point the midcap index was down 2.5 percent and then it managed to close in the green, thanks to a few heavyweights in the midcap index. The market has experienced a selling exhaustion rather than anything else.
This technical rebound and whether it continues for another day or two, it could take the market back to its 200-day-moving average (DMA). That is in the ballpark of 5,850, give or take a few points. So, sometimes when markets break important averages and start trading below that, they will get a technical rebound which generally gets capped around the average and then the downside resumes again.
Unless something dramatic happens in the global space, which is not looking very likely this morning, the one must just consider a technical pullback and should be regarded as that. It could have 50-100 points more on the index and some reconstruction in the most beaten stocks but we are still in a very pronounced downtrend, warranted by fundamentals at this point. So, something has to change in either the policy environment or the global liquidity environment to pull us out of this kind of rut otherwise we are headed lower with these technical bounces, which gets capped off maybe 100 odd points up the line.
The market turned a bit volatile yesterday because the pace at which it went to 61/USD and changeed, was too much in one day. The one thing which might have helped it in a way, is talking about curbing some of the offshore market. These are clams which might lead to some technical issues with any kind of shorting of the rupee overseas and therefore, maybe the market just reined in the negativity for the day.
But I think the range is probably breaking on the way down. Earlier the feeling was that 58/USD to 60/USD could have been the range but yesterday we went to 61/USD. So, right now maybe 59-61/USD for a few days and then we take it from there.
Yesterday’s message from the forex market is quite clear that the Reserve Bank of India (RBI) at this point cannot even think, let alone breathe a word of unwinding any of the measures that it has undertaken because the merest whiff of it sent the rupee down by a couple of rupees.
Imagine what will happen if the unwinding takes place, which was picked up by a lot of the bankers. I think there is now a direct correlation between bond yields and the rupee dollar on the way down. The more the rupee struggles, the less are the chances of any kind of softening of the hard monetary stance from the RBI and that would mean that yields will stay high and bankers will probably keep raising rates as they did yesterday. So, the collateral damage of what has happened should not go unnoticed. Rupee might float in a bit of a range with a negative bias, but the damage probably is being done already in the bond market and in the actual lending and deposit rate markets from the banks. On Emerging Market (EM) performance
We are becoming separate from every other cluster including emerging markets. There has been some amplitude in other markets like South Africa but otherwise we are in a league of our own. Emerging markets generally are a league of extraordinarily gentlemen now.
I think everybody is beset with a lot of problems around us. Brazil has done well as a stock market, as has South Africa, but everybody has their own time in the sun or in the dark. So I would not read too much into it.
Generally, the mood on emerging markets is not great. One can see that in the EM-MSCI index as well, which is just sapped of any kind of energy, there are temporary ups and downs. But broadly, not a lot of money is coming from that part of the world, from the US to the EMs. I do not think people have EMs very firmly on their radar right now.