circuit breaker 21st september 2013
DESCRIPTION
Circuit Breaker is your dose of happenings in the Capital Markets presented to you by NMIMS, MBA Capital Markets.TRANSCRIPT
Circuit Breaker 21st September 2013
MBA Capital Markets
MARKETS DANCE TO THE TUNE OF RAJAN AND BEN
The market was on a Roller coaster ride for the past 2 weeks amidst the announcements by the
RBI Governor on monetary policy of the central bank and by the Federal Chairman on whether
to taper the Quantitative Easing 3 in the backdrop of the recovering US economy.
In this series of CB Café, we have tried to analyze what are the factors that have influenced the
announcements and how the markets have reacted to the announcements.
Cb cafe
4th September
Raghuram Rajan
takes office as
RBI Governor
and announces
a slew of
reforms
18th September
Federal Reserve
announces to
keep stimulus
intact
20th September
RBI holds onto its
liquidity
tightening
measures to
control inflation
SENSEX gained 550
points to the day’s high
of 19117.52 before
settling at 18979 (rise
of 2.22 %).
Rupee went up to 65.5
from the previous close
of 67.07
SENSEX surged 3.4% or 684.48 points to end at
20,646.
Rupee rises to 61.77 against its previous
close of 63.38
SENSEX ended 382
points or 1.85%
down at 20263.71
points.
Rupee remained
volatile ending at
62.5 against $
On Rupee
Rajan: Swap dollars raised by banks
under long term FCNR (B) deposits
at a fixed rate of 3.5%
Impact: Banks will raise more dollars
from Non Resident Indians and swap
them for a concessional rate than the
previous 7%. Will lead to CAD
financing and also encourage banks
to raise dollar overseas without
currency risk
Liberalization of Banking
Rajan: a) Banks won’t need RBI
approval for setting up new branches
in any part of the country but rural
obligations need to be met. b) Aadhar
to be used in for direct cash transfer
and maintain an individual’s credit
history
Impact: More rural penetration of
Banks and financial inclusion.
Internationalize Rupee
Rajan: As trade expands, more
settlements need to be made in Rupee
Impact: Opening up the market for
rupee investment is the only way to
make foreigners accept payment for
imports in rupees. Need to check
whether there is increased demand of
rupee.
Rebooking Cancelled Forwards
Rajan: 1. Enhance the limit available to
exporters to rebook cancelled forward
exchange to 50% 2. Allow similar
facility to importers to 25%
Impact: Will have to sustain initial
volatility but will help to build market
confidence.
Rajan charms the market
4th SEPTEMBER 2013
BEN CHOOSES NOT TO TAPER
18th September 2013
ANNOUNCEMENT
The Fed decides not to taper its 85
billion dollar bond buying program
to infuse more liquidity in the
market.
Why no taper?
US jobless rate: 7.3%; won’t taper
unless it reaches a healthy 6.5%; Fed
cuts forecast of growth for to 2-2.3%
from a June estimate of 2.3 – 2.6%;
hinted at sluggishness in the US
economy; bank loans and leases also
have grown only by 4% since
recession
What it means for India?
India gets a breathing space. Should
try to curb CAD and fiscal deficit,
push projects to take off, improve
the regulatory environment and
attract stable FII inflows. Should
take corrective measures before
Fed eventually announces tapering.
Impact on Markets
SENSEX surges 684 points; Rupee
rises to 61.77; FIIs buys equities
worth Rs.3543 crore.
Top Sectors: BSE Bankex, BSE
Realty, BSE Capital Goods.
RAJAN PLAYS IT SAFE
20th SEPTEMBER 2013
REPO RATE
Repo Rate hiked by
25 basis points to
7.5%
MSF RATE
Reduced the MSF
rate by 75 basis
points to 9.5%
Daily CRR
Reduced the daily
maintenance of CRR
from 99% to 95%
IMPACT ON MARKETS
SENSEX ended 382 points or
1.85% down at 20263.71
points. Rupee remained
volatile ending at 62.5
against $
Rationale behind holding on to
the tightening measures (Repo
Rate) – Rising Inflation
WPI: 6.1%
CPI: 9.25%
IMPACT ON ECONOMY
If the liquidity was increased
by lowering the Repo Rate,
the borrowings from banks
would have become cheaper.
As a result, the already rising
Inflation would have risen
further.
TATA in cockpit
Tata Sons and Singapore Airlines signed a
Memorandum of Understanding and filed an
Application with the Foreign Investment
Promotion Board (FIPB) to start a new airline.
The plan is to invest $100 million initially.
Tata will own 51% of the joint venture with
Singapore Airlines holding the remainder.
Twitter files IPO
Twitter Inc. has filed for an Initial Public
Offering with US regulators. With over 200
million members on the micro blogging
platform, Twitter was valued last month at
about $10.5 billion by GSV Capital Corp, one of
its investors. Goldman Sachs Group Inc will be
the lead underwriter for the IPO.
SEBI eases FII investment in Debt
Until now, foreign investors had to purchase
limits through periodic auctions to be able to
invest in Indian debt market. The acquired
limits lapsed once the securities were sold. But
as per its new move, SEBI allows FIIs to invest
directly in the debt market, by doing away with
the auction process. This will help in
simplifying the process eventually leading to
more foreign inflows at a time when the
Government is struggling to rein the CAD.
Inflation Soars High
Wholesale Price Index shoots to 6.1% in August
compared to 5.79% in July. Food inflation soars
to a three-year high of 18.18 percent in August
with a 245% annual jump in Onion prices.
Farmers are expecting food prices to start
moderating from October onwards as supplies
rise from crops planted after the much better
monsoon season. More price pressure could
come in the form of a government plan to hike
retail fuel prices by nearly 10 percent to ease its
oil subsidy burden, which has risen after the
rupee's fall and on higher crude prices. This can
increase the headline inflation even further.
USFDA Bans Ranbaxy plant
US Food and Drug Administration imposed an
import alert on Ranbaxy’s Mohali plant due to
quality issues. The unexpected import ban on the
Mohali facility sent shares in Ranbaxy to plunge by
30%. Ranbaxy has assured the FDA that it will take
the necessary steps to sort out the current issue.
TRAI recommends slashing of Spectrum Base
Price The Telecom Regulatory Authority of India (TRAI) has recommended slashing the spectrum base price by 50-60 per cent for a coming auction as a result of which, Bharti Airtel and Idea Cellular rose by 8.2 and 5.6 per cent, respectively. The recommendations would not only boost the sector but also aid the government’s fiscal deficit situation.
NEWSMAKERS
Movement in Equity Markets
Dollar and Euro Movement W.R.T Rupee
-8
-6
-4
-2
0
2
4
6
80
2/S
ep
03
/Sep
04
/Sep
05
/Sep
06
/Sep
07
/Sep
08
/Sep
09
/Sep
10
/Sep
11
/Sep
12
/Sep
13
/Sep
14
/Sep
15
/Sep
16
/Sep
17
/Sep
18
/Sep
19
/Sep
20
/Sep
Pe
rce
nta
ge C
han
ge
NIFTY
NIKKEI
FTSE
Dow Jones
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
02
/Sep
03
/Sep
04
/Sep
05
/Sep
06
/Sep
07
/Sep
08
/Sep
09
/Sep
10
/Sep
11
/Sep
12
/Sep
13
/Sep
14
/Sep
15
/Sep
16
/Sep
17
/Sep
18
/Sep
19
/Sep
20
/Sep
Pe
rce
nta
ge C
han
ge
Dollar
Euro
Nifty Options Open Interest (OI)
Analysis
Maximum Call OI has changed from 5500 level to 5400 level.
Maximum Put OI has changed from 5300 to 5000 level.
Main thing to notice is the high Put OI at 5000 levels when nifty is hovering around
6000 levels
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
4900 5000 5100 5200 5300 5400 5500 5600 5700 5800 5900 6000 6100
2nd September 2013
Call OI Put OI
0
1000000
2000000
3000000
4000000
5000000
6000000
4800 4900 5000 5100 5200 5300 5400 5500 5600 5700 5800 5900 6000
20th September 2013
Call OI Put OI
FUTURES Vs. OI
The CUM-OI has been consistently high during the middle of last 3 weeks
The CUM-OI on the start of fortnight has been low but then gained momentum and touched
the peak on 10th September.
The last three weeks closed with around 8.15% % gain in futures price to end the week at
6047.20
FII Statistics
EQUITY DEBT
Date Gross Buy
Gross Selling
Net Gross Buy
Gross Selling
Net
2- Sep -13 2516.20 2014.40 501.80 1479.10 1558.20 -79.10
3- Sep -13 2078.70 2805.00 -726.30 0569.90 1940.20 -1370.30
4- Sep -13 2784.90 2682.30 102.60 1737.10 1153.90 583.20
5- Sep -13 4303.50 3199.50 1104.00 2782.70 727.60 2055.10
6- Sep -13 4071.80 2791.70 1280.10 830.20 1501.10 -670.90
10- Sep -13 5892.90 3188.40 2704.50 492.20 1067.60 -575.40
11- Sep -13 3328.30 2780.50 547.80 485.30 1358.70 -873.40
12-Sep -13 3778.20 2820.40 957.80 1179.60 1131.40 48.20
13- Sep -13 2683.30 2762.00 -78.70 1571.40 816.30 755.10
16- Sep -13 2828.50 2514.80 313.70 509.00 1842.80 -1333.80
17- Sep -13 2347.40 1996.00 351.40 607.00 1145.00 -538.00
18- Sep -13 2407.70 1882.10 525.60 229.5 541.50 -312.00
FII were net buyers of equities on most of the days.
FII were net sellers of Debt on most of the days as appreciating rupee was still not able to
improve their sentiments.
480050005200540056005800600062006400
0
5000000
10000000
15000000
20000000
25000000
CUM-OI Futures prices
ECONOMIC CALENDAR FOR NEXT FORTNIGHT
Date Currency Event Forecast Previous
Sep 22 USD Manufacturing PMI 54.0 53.10
Sep 27
INR Indian Foreign Debt - 390 billion USD
Oct 1
INR HSBC Markit Manufacturing PMI
- 48.50
Oct 2
INR Indian M3 Money Supply
- 12.6%
Oct 6
INR Indian HSBC Services PMI
- 47.6%
USD Unemployment Rate 7.3% 7.3%
Why are these events important
Event Impact Importance
Manufacturing PMI
A PMI forecast of 54 indicates good shape of manufacturing sector in
US.
A PMI of 48.5 in July for India indicates
contracting manufacturing sector.
Gauges the economic health of the manufacturing sector. Takes into account: New orders, Inventory levels, production,
supply deliveries and employment opportunities.
Mfg PMI < 50 indicates Contraction of manufacturing sector
Mfg PMI > 50 indicates Expansion of the sector.
Indian foreign Debt
External debt to GDP ratio rose from the previous fiscal signs of weak economic condition.
Measures how much liablity the country has and gives an idea on its economic health
M3 Money Supply
Indian M3 Money supply rose by 12.6% Y-O-Y slower than 14.2 percent a year earlier
Measures money supply in the market:- M1 -> Includes cash and assets that can be quickly converted into currency. Measures liquidity. M2 -> M1 + Time-related deposits + Savings deposits + Non institutional money-market funds M3 -> M2 + Other larger liquid assets.
OPTIONS
Options are derivatives that give the holder a right to buy or sell an underlying asset for a certain price at a certain date. The certain price at which the underlying assets are bought or sold is called the exercise price or strike price, and the date in the contract is the expiration date or maturity. Options are traded both on exchanges and in the over-the-counter market. Call Option A call option gives the holder a right to buy an underlying asset for the strike price at the expiration date. Consider a scenario where the current price of a share of XYZ Company is Rs.100. If you think that the price of the stock will rise in future, you could buy the stock or buy an option. Suppose you buy a call option with following specifications – Price: Rs.10 Strike price: Rs.120 Maturity: 1 month from now Case 1: As you expected, the value of the share rises to 160 at expiration date. You can now exercise the option and buy the stock at the strike price of Rs.120 and immediately sell them at Rs.160. This gives you a profit of Rs.35 (taking into account the price of the option).
Case 2: Contradictory to your expectations, the stock price falls to Rs.40. If you had bought the stock, you would have lost Rs.60. But in this case you might not exercise the option and limit the loss to the price of the option, i.e. Rs.10. Generally, the price of a call option decreases as the strike price increases.
CB CLASSROOM
Put Option A put option gives the holder a right to sell an underlying asset for the strike price at the expiration date. A put option is used when the investor wants to gain from the decline price of the share. Same as the earlier example let the current price for XYZ Company be Rs.100. If you think that the price of the stock will fall in future, you could buy a put option. Suppose the specifications of the put option are as follows – Price: Rs.10 Strike price: Rs.90 Maturity: 1 month from now Case 1: As expected, the value of the share falls to Rs.40 at the expiry date. Now at the maturity, you can exercise the put option and buy the stock at the current price of Rs.40 and immediately sell them at the strike price of Rs.90. This will give you a profit of Rs.45, subtracting the price of the option.
Case 2: If the stock price increases, instead of falling, the put option is not exercised and the loss is equal to the price of the option, Rs.10. Contrary to call option, the price of a put option increases as the strike price decreases. Unlike forwards or futures, where the holder is obligated to buy or sell the underlying asset, an option gives the holder the right to exercise it. American options can be exercised at any time upto maturity, but a European option can only be exercised at the expiration date. SEBI introduced the European style of trading options in 2010, prior to which the American style was being used at the exchanges. European style of trading options makes the pricing and valuation simpler than that of the American option. While the ability to execute an American option at any time during the contract makes it more flexible, it also makes it more expensive.
The Editorial Team of Investocraft
Chakshu Aggarwal Editor in Chief
Ravi Srikant Content Head
Khushboo Shah Communications
Pratik Jain Circuit Breaker
Tanvi Mittal IT Head
Shekhar Kaushal Design Head
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