India-watchers have long-standing complaints about the abysmal quality of government statistics. There are big discrepancies and gaps in the data used to calculate the wholesale price index, the consumer price indices, the index of industrial production, the state-wise aggregates of the gross domestic product (GDP), trade, and so on.
Now, the finance ministry has itself disputed the advance GDP estimates for 2012-13, which are calculated by the Central Statistical Organisation, an arm of the Ministry of Statistics and Programme Implementation (MOSPI). Inter-ministerial rivalries aside, MOSPI's estimate of five per cent GDP growth in 2012-13 was about 50 basis points short of consensus. The finance minister may review upwards with an estimate of, say, 5.5 per cent. It doesn't matter really. Even 5.5 per cent equates to a 10-year low.
The key question is, is the trend reversing or will growth rates fall further? The International Monetary Fund (IMF) projects 5.4 per cent GDP growth and suggests further deceleration in pointing to the usual suspects. Investment has fallen. There is a record current account deficit and a very high Fisc. The IMF also fingers under-provisioned fragility in bank balance sheets owing to loan restructuring, and suggests the long-term trend rate of GDP may have dropped to 6.5 per cent. Admittedly, the IMF has a history of making major errors if that's any comfort.
The Reserve Bank of India (RBI) made minimal cuts of 25 basis points in both the repurchase rate (repo) and the cash reserve ratio (CRR). Bulls expecting bigger cuts unwound long derivative positions. Domestic selling on delivery has also been heavy, implying long-term investors have cut equity exposure.
This is one of those rare phases when a very positive foreign institutional investor (FII) attitude hasn't translated into rising share prices. The FIIs made massive net equity purchases of Rs 17,700 crore between February 1-8, while the Nifty fell three per cent. Domestic institutional investors sold Rs 2,000 crore. The bulk of consolidated FII purchases must have been matched by equivalent selling from domestic retail and operators.
Owing to FII purchases, the rupee gained against the dollar during the last fortnight, albeit trading was very volatile. The trend could reverse, especially if FII do a bit of selling. There is a spat developing between the British and the French in the euro zone, as the European Union debates its Budget. This has led to the dollar strengthening against the euro. In cross-currency terms, the greenback could harden versus the rupee, while the rupee may gain against the euro. A long dollar-rupee trade looks tempting, and so does a short euro-rupee trade.
On the domestic front, the Budget will dominate economic discourse in the next three weeks. It is due to be announced on Settlement Day, promising massive volatility. P Chidambaram has hinted at higher taxes on the "very rich". There are also rumours of a commodity (futures) transaction tax on the lines of the securities transaction tax, which is levied on equity and equity-derivative trades. There is some fear of further restrictions on gold imports.
None of this sounds positive. Nevertheless, there's likely to be some bullish activity of the last five to 10 sessions of February from the eternal optimists. In his previous Budgets, Chidambaram has shown considerable dexterity in managing market reactions. Many investors will hope against hope that he can somehow pull off another dream Budget.
It is a very difficult task. A rebound in the growth rate can only happen on the back of fresh investment, coupled to fiscal consolidation to control the twin deficits. The latter is unlikely in a election year when any government will avoid cutting entitlements and subsidies. There are no real signs of rising investment. So, it's possible the Budget will cause further disappointment.
One trend the investor can reasonably expect is that the RBI will now continue to cut rates. The central bank is being pushed in this direction, given weak growth. Ceteris paribus, this would lead to a bull-run across rate-sensitive stocks. But the RBI has also released draft guidelines, raising provisioning on restructured loans considerably and setting tougher norms for upgrading non-performing assets (NPAs) to standard. A Bank of America-Merrill Lynch study suggests that this could lead to a three to eight per cent drop in profits reported by public sector banks. Speaking personally, I'd respond positively to more trustworthy bank balance sheets with higher provisioning and lower profits. But the market as a whole may further downgrade public sector bank stocks.
Another thing that could alter sentiment for the better would be more determined policy implementation in the infrastructure space. Infrastructure has the potential to rapidly absorb large and productive investments. But activity here has been stalled by intractable issues. Roadblocks such as tardy clearances, land acquisition issues and political interference have long been identified but simply left to fester.
Is the government desperate enough to tackle these? I'd look to see if the National Highway Authority of India speeds up pending project awards and also for a spectrum auction that goes through smoothly. For what it's worth, the NTPC stake sale went through easily enough.
On the technical side, the Nifty may have broken key support at around 5,920. It could slide till it hits another support somewhere between 5,775-5,825. Or, it may recover from the 5,900 level where it is now. As mentioned above, at some stage traders will start getting bullish about the Budget. The next three weeks may be extremely volatile with a climax coming on Budget-cum-Settlement day. A prudent trader should be braced for a swing between 5,750-6,050 in the next fortnight.