Of Jerome Powell's Congressional Testimony, Indian PSBs, and Other Top Cues This Week

During the week, Federal Reserve Chairman Jerome Powell appeared before the House Financial Services Committee. This was his first testimony since he took charge earlier this month.

He said that his expectations for domestic economic growth have increased since the beginning of the year, citing the passage of the US$1.5 trillion tax cut and stronger global growth.

On interest rates, Mr Powell said that the Fed planned to continue increasing its benchmark interest rate only gradually, as it did under his predecessor, Janet Yellen.

Investors, however, responded to his optimism as an indication the Fed may be compelled to move more quickly on interest rates. As Powell testified, stocks fell, the dollar strengthened and bond yields rose.

Many expect that a tightening labour market and increased government spending in the US would further boost inflation and will force the Fed to be more aggressive in raising interest rates this year.

The Fed has forecast three rate hikes this year. The first increase expected at its next policy meeting in March.

In its latest meeting, the Fed said it expects "further gradual" rate increases. The target range for the federal funds rate currently is 1.25% to 1.50%.

Note that with the US economy chugging along for many months, the Fed is now gradually easing off the stimulus it provides to the economy by raising interest rates to more normal levels.

How does a US interest rate hike affect Indian investors?

The instant effect is foreign money moving out of India's vaults. This means a slight correction in the share market in India, albeit temporarily.

While this might provide a good buying opportunity in long-term stocks, the main thing to look forward would be capex and earnings trends.

In the end, Indian investors are better off staying informed about the corporate earnings revival than Fed rate hikes.

Indian Stock Market Trades Volatile

Back home, the Indian indices ended their weekly session on a negative note. The BSE Sensex was down 0.28% for the week, while the NSE Nifty was down 0.31%.

In the news from the banking sector, as per a leading financial daily, the government has ordered all state-run banks to examine non-performing loans of more than Rs 500 million for any wrong doing similar to the Punjab National Bank (PNB) fraud.

The banks have been given 15 days to also prepare a pre-emptive action plan to address such risks.

The above development would mean investigations in high-profile bankruptcy cases that are undergoing resolution, and putting their promoters under the scanner if any scams are uncovered.

The share of large corporates, in total advances of the banking sector, has almost remained unchanged over past three years (at an average of 55%).

However, their contribution to incremental slippages has been huge. At one point, the big corporate borrowers accounted for nearly 90% of total NPAs of the sector.

Banks, in principle, must be careful about not extending loans to borrowers with poor creditworthiness or payment track record. That too, irrespective of the size of the borrower.

While the bad loans struggle at PSBs has been going on since a decade, there are other issues that have recently cropped up adding to their pile of misery. Bureaucracy and a lack of autonomy have ensured the sub-optimal profitability and asset quality of these state-run banks.

In the news from the cement sector, Ambuja Cements Ltd and ACC Ltd have called off their long-due merger for now.

The companies have cited some current constraints relating to the transfer of mines between the two companies for the above development.

However, Ambuja Cements have told exchanges that merger remains the ultimate goal.

The companies had first gone public with their announcement regarding their potential merger last year in May when they had said a decision is dependent on the recommendation received from the special committee and the audit committee.

On the back of the above development, Ambuja Cement share price and ACC Ltd share price are trading down by 4% and 1.5%, respectively.

In other news, India reported a fiscal deficit of 6.77 trillion rupees for April-January. This translates to 113.7% of the target originally set for the fiscal year that ends in March.

Net tax receipts in the first ten months of FY18 fiscal year were 9.7 trillion rupees, government data showed.

Note that Finance Minister Arun Jaitley in the Budget 2018-19 said the fiscal deficit target for the current year has been raised to 3.5% of gross domestic product (GDP) from 3.2% earlier. It also outlined the projected fiscal deficit target of 3.3% in FY19 in its budget.

Maintaining this deficit target in FY19 won't be easy. Fiscal deficit basically means the amount a government earns minus the amount it has to spend. The lesser the fiscal deficit, the better the government has performed.

In the past, the government has relied on reducing expenditure to keep the fiscal deficit in check. However, for the next year, the government is banking on earning much more than it has in the past. It expects a major portion of the revenue to be collected through GST tax collections.

The recent rise in crude oil prices has cast a doubt over how much the government will be to curb its spending. It also needs to revive the economy from the shock of Notebandi.

The dual pressure of increasing expenditure and lower inflows makes this FY19 deficit target an uphill challenge.

Nifty 50 Index Ends Marginally Down
Nifty 50 Index Ends at Life-time High

The Nifty 50 Index traded on a volatile note during the week.

On Monday, it opened the session gap up and rallied 92 points to end the session positive. Infact the momentum continued until Tuesday afternoon and the index slipped, trading negatively for the remainder of the week. It finally ended the weekly session 0.31% down.

For past three weeks, the index is finding resistance from 10,650 - 10,700 level (red line). This week as well, it slipped after touching a high of 10,632. On the flip side, the rising trendline (blue line) is providing good support for the index.

So unless we see the index breaking the trendline or 10,700 level, we can expect it to trade within this range.


Gold Trades on a Negative Note

Gold traded on a negative note during the week. It opened its weekly session higher on Monday and continued to trade up to end the session positive. But the yellow metal did not sustain up for long and slipped lower during mid-week. Gold fell as investors interpreted comments from Federal Reserve Chairman Jerome Powell to mean that the US may raise interest rates more frequently than anticipated this year. It recovered a bit on the final day of the week but ended its weekly session with 0.43% loss.

Gold Trades in a Downtrend

Crude Oil Witnesses Selling Pressure

Crude oil too traded on a negative note during the week. It opened the weekly session higher on Monday and traded up to close the session positive. But the buying was temporary as the black gold slipped lower for the reminder of the week. Crude oil prices fell as weak Chinese and Japanese industrial data triggered concerns of an economic slowdown that could lower oil demand. The fall was also due to increase in US crude stockpiles amid soaring output. It finally ended the weekly session 0.78% down.

Crude Oil Ends a Percent Down


Dollar Hits 3-month High

The dollar traded on a positive note during the week. It opened its session lower on Monday but recovered and traded positive throughout the week. The dollar rose after the US Federal Reserve's hawkish comments reignited interest rate hike fears. The rise was also seen due to increased demand for the US dollar from importers amid sustained foreign fund outflows. It ended the weekly session 0.55% up.

Dollar Ends in the Green

Commodities 23rd Feb 28th Feb % Change
Gold/10 gms 30,509 30,379 -0.43%
Silver/kg 38,403 38,246 -0.41%
Crude Oil/barrel 4,125 4,093 -0.78%
Natural Gas/mmBtu 174.20 175.90 0.98%
Currencies 23rd Feb 28th Feb % Change
USD / INR 64.96 65.32 0.55%
EUR / INR 79.99 79.94 -0.07%
GBP / INR 90.67 90.77 0.10%
JPY / INR 60.82 61.03 0.35%

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