Indian Economic Update

• Mr. Arvind Subramaniam (Chief Economic Advisor to the Govt. of India) led the panel presented recommendations for the implementation of the much awaited Goods and Service Tax (GST) bill.
  • The panel has suggested a Revenue Neutral Rate (RNR) of 15-15.5% and standard rate of 17-18%, coupled with a tiered tax rate framework.
  • The panel has considered the case for a widening of the tax base through inclusion of petroleum, real estate and electricity.
• Credit Ratings Company Fitch kept India’s investment rating unchanged at BBB-, stating that India has strong medium term growth outlook, coupled with strong external finances.
  • These, however, remained balanced against an environment of high government debt and weak structural attributes.
• The Union Cabinet approved the Real Estate (Regulation and Development) Bill, 2015.

Global Update

Highlights of OPEC meeting in Vienna

• OPEC rolled over its policy, i.e., it will not cut output (in a bid to preserve/raise market share), extending a policy that accelerated a commodity price collapse one year ago.
• OPEC raised the output quota to 31.5 million barrels per day (mbpd) from 30.0 mbpd previously.
• Indonesia re-joined OPEC

US NFP: Labour market recovery paves way for Fed lift-off

• US Non-Farm Payrolls (NFP) rose by 211K in November, higher than the market consensus of 200K.
• The above 200K print for the second consecutive month indicates continued recovery in the labour market.
• The above 200K NFP print combined with the continued pace of recovery in the US economy makes way for the start of the normalisation process.
  • This fact is further reinforced by recent hawkish commentary from Fed officials (including Fed Chair Janet Yellen).
  • Focus is now likely to shift to cues on the pace of normalisation, which is expected to be extremely gradual given the subdued inflation and tepid wage growth.
  • FOMC policy meeting on December 15-16, 2015 will be closely tracked.

UK: BoE keeps policy rate unchanged at 0.50%

• Bank of England (BoE) maintained status quo and kept the bank rate unchanged at 0.50%
• The BoE minutes of the meeting said that global growth had stabilised but downside risks to Emerging Markets could not be ruled out.
• The BoE noted that on balance, inflation was expected to return to the target of 2% over the next two years.

Japan’s Q3 GDP was revised to 1.0% QoQ, vs. the prior calculation of -0.8%. Positive GDP growth rates for this quarter suggest that Japan did not fall into a recession, contrary to the previous notion.

Equity

Indian equities started the week lower and continued its slide tracking a fall in global equities and concern over lack of progress on the Goods and Services Tax (GST) bill in the Winter Session of the Parliament.

Foreign Institutional Investors repositioned themselves ahead of the US Federal Reserve's monetary policy. Domestic sentiments were also dented due to concerns over the rate hike by the US Federal Reserve in the near future.

Meanwhile, markets snapped its 6 day losing streak on Thursday. Recovery was seen across sectors. The rally was fuelled by buying in Oil & Gas, IT, Metals and Realty.

During the week Sensex lost 2.32% to close at 25044.43 while Nifty declined 2.29% to close at 7607.45.

Debt

Gilt started the week flat as the result of the open market bond purchase disappointed market players. The market’s appetite for dated securities remained subdued following the result of the open market bond purchase in the previous session.

However, decline in global crude oil prices after the OPEC decided to maintain current levels of production at its meeting last week despite a supply glut provided positive support to bonds.

Market players braced themselves for the US Federal Open Market Committee’s meeting next week.

Expectation of an open market bond purchase announcement from the RBI surprised the market positively, value buying also supported the bond prices. However, rupee’s weakness against the US dollar exerted pressure on bonds.

The 10-year benchmark 7.72%, 2025 bond ended at 7.80% as compared to previous week’s close of 7.76%.

Gold

Gold prices started the week in red, trimming gains from last Friday’s rally. Broad based strength in the US Dollar, following robust reading of US jobs data has started to weigh on the bullion.

Gold is poised for further decline as the FOMC policy decision inches closer. Weakness in US Dollar led to gains in the gold prices mid-week, though the rally is expected to be short-lived owing to the impending Fed lift-off this month.

Oil

Oil prices continued their downward trajectory this week as well, extending the losses seen last week. OPEC’s decision to raise production quotas to 31.5 mbpd has sent jitters through the oil markets, with WTI prices falling below the psychological USD 40/bbl mark.

Meanwhile, American Petroleum Institute’s data releases indicated a reduction in US inventory levels last week contrary to the market’s expectations of an increase in the same, thereby limiting the downside.

Currency

INR started the week weaker against the US dollar owing to dollar demand from banks and weakness in Indian equities. OPEC’s decision to maintain output aided the rupee to some extent.

The rupee ended at an over 2 year low against the US dollar on Tuesday as importers purchased the dollar persistently through the session. Banks also demanded the dollar noting the weakness in domestic equities, thereby pulling the rupee down further.

Meanwhile, some foreign banks sold the dollar and provided the rupee support. Soft global crude oil prices and comments from credit rating agency Fitch regarding India’s GDP projection propped up rupee. Heavy dollar sales by state-owned banks also supported the rupee.

The Reserve Bank of India issued guidelines for introduction of cross currency futures and exchange traded cross currency option contracts in the currency pairs of Euro (EUR) - US Dollar (USD), Pound Sterling (GBP) - USD and USD - Japanese Yen (JPY). Further, exchange traded option contracts in the currency pairs of EUR - Indian Rupee (INR), GBP - INR and JPY - INR have also been introduced in addition to the existing USD - INR pair. The cross currency contracts shall enable direct hedging of exposures in foreign currencies and facilitate execution of cross-currency strategies by market participants.

Source: ICICI Bank Research, Bloomberg and CRISIL