India’s Union Budget unveiled on 28 February 2015 ignited trading interest in domestic equities as foreign funds rushed to penetrate the market.
The Budget promised sufficient changes to ignite fresh optimism in Indian growth during Modi’s reign.
The CNX Nifty Index gained 160.75 points on 28 February 2015 and topped 9,000 points on 3 March 2015. A surprise rate cut by India’s central bank on 4 March is expected to add to India’s export competitiveness on a falling Rupee.
SGX CNX Nifty Index Futures led in price discovery during the special India Union Budget trading session on Saturday, 28 February 2015.
Budget Ignites Rally
The much-awaited India budget, while not the game changer as some anticipated, managed to stoke fresh anticipation for India’s potential growth.
Corporate income tax is set to be lowered to 25% from the current 30% over the next four years. An additional 700 billion rupees (US$11.3 billion) will also be injected into the country's roads and railway infrastructure in fiscal year 2015.
A national investment and infrastructure fund, which would raise debt and invest in infrastructure, is also being considered. If set up, the fund will help to enhance funding accessibility for local firms.
The CNX Nifty Index rallied on Saturday trading gaining 160.75 points. The budget triggered a buying frenzy in domestic stocks in the following week. A net total of 134,088,210 units were created in India-related ETFs between 28 February to 3 March 2015, according to Bloomberg data.
Net Creation of ETFs (28 February- 3 March 2015)
On the other hand, some observers expressed disappointment with Prime Minister Modi avoiding the potential political costly battle of scrapping food subsidies. The cost of the South Asian nation's food subsidies for the fiscal year ending on 31 March 2015 is estimated to surge by 25% to 1.15 trillion rupees (US$18.6 billion) year-on-year. The combined subsidy for rice and wheat accounted for a third of India’s total subsidy bill.
The failure to scrap subsidies coupled with the projected increase in capital spending would mean that the government has to push back its target of reducing fiscal deficit to 3% of GDP by a year to 2018. The fiscal deficit is expected to occupy 3.9% of GDP in 2015 while the economy is projected to expand between 8% and 8.5% year on year.
Luckily for India, the dip in oil prices allowed for the increased spending without a corresponding cut in food subsidies.
India’s Fiscal Surplus/Deficit
Some analysts have stated that the budget is far from the game-changing budget of 1991 which ushered in India's economic liberalisation.
On the other hand, others pundits such as rating agency Standards & Poor praised the budget, stating it displayed “the government's commitment to keeping the fiscal deficit low despite lower-than-expected revenue growth”.
Morgan Stanley was also positive, stating "The budget lends greater conviction to our out-of-consensus earnings forecasts for the coming two years", and "we continue to be bullish on Indian equities with our key overweight positions being private sector banks, industrials, discretionary consumption and technology”.
CNX Nifty Index Tops 9000; SGX CNX Nifty Index Futures Registers Robust Interest
Despite these mixed feelings, foreign investors voted with their fingers and invested millions of dollars into the India stock market.
On 28 February 2015, the CNX Nifty Index gained 160.75 points to close at 8901.85.
The surge continued with the CNX Nifty index crossing the 9000 mark for the first time before closing at 8996.25 on 3 March amidst continued optimism over economic reforms and foreign fund buying. The Nifty has surpassed its previous lifetime high of 8,996.60 set on 30 January 2015.
Performance of SGX Nifty Index Futures
The SGX CNX Nifty Index Futures contract continued its inexorable advance in line with the broad equity market. The contract has set a number of new records since the start of the year. January saw a record high of 1,991,291 contracts traded with highest average daily volume of 99,565 contracts. Open interest touched 534,531 on 24 February 2015.
Strong trading interest was also seen in the roll market. As of 25 February 2015, 87.1% of the February 2015 SGX CNX Nifty Index Futures contract have been rolled into the March 15 contracts. This is markedly higher than the 1-year historical average of 78.7% as market participants took positions ahead of budget day.
Meanwhile, the CNX Nifty Index is set to undergo a rebalancing exercise. With effect from March 27, 2015, Jindal Steel & Power and DLF will be excluded from the CNX Nifty Index while Idea Cellular and Yes Bank will be included. The inclusion of Yes Bank, will increase the financial sector weightage in the 50-stock index. With Yes Bank, Nifty will contain nine banking stocks. However the inclusion of these two stocks is not expected to add much volatility to the index. Examination of the average standard deviations of the Jindal Steel, DLF, Idea Cellular and Yes Bank reveal that DLF exhibits the highest day-to-day volatility.
Sectors of CNX Nifty Index
Average Standard Deviation (2008- 2014)
Act 1 Scene 2 – Devalue Your Way to Prosperity
On 4 March 2015, India’s central bank added fuel to the euphoria by lowering interest rates in a surprise move for the second time this year, a booster for Prime Minister Narendra Modi’s first full-year budget.
The benchmark repurchase rate was cut to 7.5% from 7.75%.
“This makes explicit what was implicit before –- that the government and the Reserve Bank have common objectives and that fiscal and monetary policy will work in a complementary way,” Governor Raghuram Rajan said in a statement. INR slumped against the US dollar, falling 0.77%.
The cut in repo rate will further aid India’s exports competitiveness and boost the “Make in India” campaign championed by Prime Minister Modi. The USD/INR rate has been outperforming other Asian currencies since the start of the year, gaining 2.39% even as other currencies lost ground.
Performance of INR and Major ASIAN Currencies against the Greenback (Jan-Feb 2015)
Francis Tan of UOB Global Economics & Markets Research said “We think that the RBI will keep the current repurchase rate unchanged for now, as once the US starts their interest rate normalisation in the middle of this year, capital outflow worries could once again be on RBI’s dashboard. We recall the period of capital outflow and the quick depreciation of the INR during May 2013 when the US Fed started the ‘taper talk’”.
Volatility could spike in the coming months as the US proceeds to raise rates.
The SGX INR/USD FX Futures contract saw 187,405 contracts (approx US$6 billion in notional value) traded in February with open interest rising 55.3% on the month to reach a high of 16,019 contracts as at 27 Feb 2015. The futures contract has seen steady growth in volume and open interest since July 2014.
Weekly Volume and OI of SGX INR/USD FX Futures Contract
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