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From the overseas road show by Finance Minister P. Cidambaram to the government’s pledge ahead of the elections, state spending has surged by a record 16% in the fiscal year compared with 9.7% in the previous fiscal year. The surprise rate hike earlier this week - to halt the rupee depreciation - could be seen as curbing growth with tighter liquidity.
There was a notable outflow of foreign funds from the Indian equity market in June, with a selling of $1.8 billion worth of shares, followed by a further $929 million this month.
Yet sentiment seems to have shifted towards a more optimistic outlook with most analysts expecting the equity market to gain more than 6% in the second half of this year.
With the current valuation at 13 times projected earnings, it might appear attractive compared to its peak of 18 times in 2010. India’s headwind persists with GDP in March at 5%, the slowest level of growth since 2003. A peak of over 9% growth was seen in 2007, 2008 and 2011.
From a technical point of view, the rupee has broken out of a wedge since mid-2012. The breakout should sustain with further upside.
Gold futures for August delivery continue to inch higher, trading at 1292 at 8.25am Singapore time, as the dollar index DXY slid 0.6% overnight to hover at 82.567, awaiting Bernanke’s testimony. The fate of gold will be determined by whether talks of tapering are reignited.
Given the unintended remarks about tapering that shook the markets, we expected Bernanke to keep the markets calm by reiterating his previous comments. Silver futures for September delivery changed little this morning at $19.95 an ounce. The ETF showed an increase of 1.5% in weekly holdings in the iShares.
WTI crude is also little changed after dropping overnight from a high of $107.02 a barrel. Profit taking at these levels continues to put downward pressure on further upside. Brent for August contract closed out yesterday at 109.40. It has gained 6.2% this month.