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Wednesday, January 28, 2009

Investing Term of the Day: forward price

Term of the Day - forward price

For Wednesday, January 28, 2009

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Term of the Day - forward price

The price specified in a forward contract for a specific commodity. The forward price makes the forward contract have no value when the contract is written. However, if the value of the underlying commodity changes, the value of the forward contract becomes positive or negative, depending on the position held. Forwards are priced in a manner similar to futures. As with a futures contract, the first step in pricing a forward is to add the spot price to the cost of carry (interest forgone, convenience yield, storage costs and interest/dividend received on the underlying). However, unlike a futures contract, the price may also include a premium for counterparty credit risk, and there is not daily marking-to-market to minimize default risk. If there is no allowance for these credit risks, then the forward price will equal the futures price.

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Quote of the Day

Money is of no value; it cannot spend itself. All depends on the skill of the spender. - Ralph Waldo Emerson

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Markets 4 U

Equity Market Update for - January 28, 2009

Equity Markets For The Day

The Sensex ended the day with a gain of 253.39 points, or 2.81% at 9,257.47. The broad-based NSE Nifty climbed 78.15 points, or 2.82% at 2,849.50.

Top Gainer were Ranbaxy(8.31%),ICICI Bank(7.78%),DLF(6.45%),L&T(5.12%),Tata Motors(4.92%).

Major losers were Maruti(3.15%),Rel Comm(3.15%),Sterlite(0.63%),Grasim(0.05%).

Overall market breadth was positive. Out of the total 2,530 stocks traded at BSE, 1,403 advanced, 1,025 declined while 102 remained unchanged

The

INDEX	CLOSE	POINTS	%CHANGE
NIFTY	2,849.50	+78.15	2.82%
SENSEX	9,257.47	+253.4	2.81%

TOP 3 GAINERS (source: bseindia.com)
GAINERS	LAST PRICE	% GAIN
RANBAXY	215.00	8.31
ICICI BANK	411.00	7.78
DLF	177.40	6.45
TOP 3 LOSERS
LOSERS	LAST PRICE	% LOSS
MARUTI	520.50	3.15
REL COMM	166.20	3.15
STERLITE	266.10	0.63

Debt Market Update for January 28, 2009

MIBOR

4.21%

FOREX
$ Rupee	48.92/48.93
1 year fwd	1.94%-1.98%

WPI INFLATION

5.6%

Money market rates
	CD
30 days	7.5-9.0%
90 days	8.0-9.0%
1 year	8.5-9.5%

G SEC YIELD
30 year (6.83% GOI 2039)	7.07%
9 year (8.24% GOI 2018)	6.04%
US 10 YR. yield	2.51%

NEXT AUCTION AS PER CALENDAR

Jan 30-GOI-5 yr-Rs.3000 cr; 30 yr -Rs.3000 cr; 10 yr -4000 cr

Last Auction

Jan 16-GOI-5 yr-Rs. 4000 cr; 9 yr -Rs. 3000 cr, 30yr - Rs. 3000 cr

TREASURY BILL AUCTION
TENOR	SIZE	DATE	CUT OFF	PREVIOUS	CUT OFF
91 day	8000 cr	28-Jan	4.79%	21-Jan	4.67%
182 day	1500 cr	21-Jan	4.55%	07-Jan	4.64%
364 day	1000 cr	28-Jan	4.59%	14-Jan	4.51%

YIELD COMPARISON
SECURITY	TODAY	1 D Ago	1 Wk Ago	1 Mt Ago
	28-Jan	27-Jan	21-Jan	26-Dec
8.24% GOI 2018	6.04%	5.97%	5.89%	5.61%
7.99% GOI 2017	6.45%	6.41%	6.42%	6.14%
6.83% GOI 2039	7.07%	7.11%	-	-

CORPORATE BOND MARKET

Market Behavior and sentiment for the day: Corporate bond market was lack-luster.

AAA BENCHMARKS / SPREADS
1Y	8.40	397
2Y	8.35	314
3Y	8.60	333
4Y	8.78	292
5Y	8.80	286
6Y	8.99	272
7Y	9.18	381
10Y	8.88	284

G-sec market comments: G-sec markets were weak on G-sec auction announcement, higher T-bill auction cut-off and no change in the benchmark rates in RBI's policy meeting.

The benchmark G-Sec bonds (8.24% GOI 2018) yields closed at 6.04% as against the previous close of 5.97%.

Liquidity was comfortable, with over night money market rates in 3.5%-4.5% range. The net RBI's LAF balance was positive at around Rs.63,250 cr.

This week, the markets is expected to take cues from G-sec auction cut-off, domestic liquidity position and inflation numbers and global economic data-points.

Contact Us / Sign up a friend :
Sources: NSE MIBOR, Top Gainers and Losers :- nse india.com. Dollar/ Rupee Rate, Forward Premia, Repo amounts, Sensex / Nifty details, Tbill auction details, Auction details :- Reuters. Gsec Benchmark and U.S. yields, Corporate yields :- Reuters, Bloomberg & RMF Team. CP benchmark :- Bloomberg and RMF Fund Managers. FII flows :- sebi.gov.in
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RKM Indicators_Jan, 2009

Roti, Kapda aur Makaan Indicators (RKMI) : tell us how Indians' material needs (Roti, Kapda aur Makaan) are growing (demand) and being satisfied (supply) and therefore, what India's future economic (GDP) growth will look like.

The data comprising the "Roti" indicator guides us on food prices and inflation.
The data comprising the "Kapda" indicator guides us on consumption trends (not just clothes but all consumer goods).
We have not restricted our interpretation of Makaan to real estate. The data comprising the "Makaan" indicator guides us on overall investment trends. It includes investment, infrastructure, credit as well as trade.

Note that there are several other indicators that we use in forming our economic views. This is just a snapshot of the regular, reliable, readily available data that we thought would interest our readers.

What do the latest RKMI tell us:

WPI inflation declined to 6.5% in Dec, almost half from its peak value of 12.6% in August. Food inflation continues to be in double digit, particularly fruits and vegetables.
Consumer durables saw the largest contraction of 4.2% in November, down from an average 10.8% growth in Q3 2008. Growth in auto sector sales continues to disappoint
Merchandise export growth contracted for second month. Imports also declined – non-oil imports declined significantly.
Credit growth reached its peak in Oct as external credit had dried up. But since Nov, it is declining as credit demand went down on continued high lending rate.

What to Watch For:

Will the seasonal factors bring down the prices of vegetables and fruits as food prices are inelastic to economic slowdown?
Even as the rural consumption continue to hold up since it is unaffected by global downturn, how long will it take for urban consumption to revive given various fiscal stimulus packages?
Will the recent initiatives of allowing accelerated depreciation for CVs revive commercial vehicle sales or a slowdown in industrial output will continue to impact the sales negatively?
Will the moral suasion by finance ministry and RBI prompt bankers to cut lending rate and boost credit growth in coming months?

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Tuesday, January 27, 2009

POST POLICY PULSE - Rates unchanged but monetary easing not over

Pre policy action steals limelight from the policy

n The Reserve Bank of India (RBI) since Q4 CY08 has initiated various conventional and unconventional measures registering the quickest change in stance and possibly the smallest interest rate cycle - the apex bank reversed the four-year elongated hawkish stance in a meager three months (Q4 CY08). After a steep cut on January 2, the apex bank left all rates unchanged in the Third Quarterly Review of monetary policy on January 27.

Impact analysis

While all monetary and fiscal measures were concentrated in Q4CY08 (pre and post October 24 policy) they had a significant impact on the fixed income segment:

G-sec posted a ~450bps rally to an all-time low of 4.86%.
Corporate bonds gained additional ground compared to their sovereign counterparts as they trailed G-secs and spreads also compressed by ~100bps.
Lucrative low rates: Primary issuers flocked to the debt market as other avenues dried as well as for the significantly low borrowing cost.
With cash rich vaults and lower borrowing cost, CDS of banks and corporates trading in off shore markets eased from their October highs.
Swap market knows it all: Steep fall in swap rates by ~500bps to sub-5% levels factoring in further rate cuts and buoyant cash conditions.
Dual fiscal blow: Additional spending led to additional borrowing; total government borrowing for FY09 touched INR 2.15 tn (budgeted INR 1.45 tn).
Shortfall to surplus: In a matter of three months, CRR injected 1.6 tn; from a shortfall of INR 1 tn in October 2008 we have ~INR 0.5 tn in LAF reverse repo.
Lazy banking: Funds flow to greener (safer) pastures. Risk aversion by banks has induced them to prioritize SLR (risk free) investment over corporate lending.

Silent policy leaves participants guessing

While the central bank on January 27 left all key rates unchanged, it briefly signaled future calibrated, swift, and effective monetary measures to minimise the impact of the crisis on the already slowing economy. Some of the key takeaways of the statement are:

n RBI has recognised that growth has slowed down and also revised down its GDP estimate to 7% with a downwards bias. Also, credit growth target has been revised upwards to 24%, indicating that further softening of policy rates is required to revive the economy and compelling banks to shore-up lending.

n Words like "swiftly, effectively and decisively" indicate a lower probability of big-bang cuts witnessed over the past three months.

n With too much emphasis on comfortable liquidity and also acknowledging that the entire effect of CRR cut is with met with a lag effect of 4-6 months, further liquidity boost by way of pruning the reserve ratio in the near term would have a lower probability. MSS buy-back along with refinancing is likely to serve the purpose of injecting liquidity.

n Unlike the previous policy, where only a week after the policy the RBI had slashed rates by 100bps, this time further measures will depend on the release of macroeconomic data. We are unlikely to witness immediate measures as the RBI believes that results of actions taken over the past several months are still to unfold.

n The bond market had completely priced in such a move (silent policy); and, therefore, significantly reduced (only event-based) volatility is expected. 10-year benchmark is expected to witness sideways trading near current levels with an overall downward bias. Despite supply worries being one of the major negative factor the benchmark yield is expected to test the 5.60-5.75 levels in near term; any further decline needs to be fueled by a rate cut or its rumor.

Overall, it is a perfect 'wait-and-watch' policy where any further measures will only be subject to how macroeconomic indicators develop over the next quarter. While the slackening domestic growth and downside risks to IIP advocate further rate cuts, lagging impact of previous cuts will influence RBI to buy some time before the next move. Though rates have not been changed, this cannot be interpreted as a neutral stance and further easing would be on the cards to ensure that we are still in a bond positive market.

POST POLICY PULSE - Rates unchanged but monetary easing not over

Pre policy action steals limelight from the policy

Impact analysis

While all monetary and fiscal measures were concentrated in Q4CY08 (pre and post October 24 policy) they had a significant impact on the fixed income segment:

G-sec posted a ~450bps rally to an all-time low of 4.86%.
Corporate bonds gained additional ground compared to their sovereign counterparts as they trailed G-secs and spreads also compressed by ~100bps.
Lucrative low rates: Primary issuers flocked to the debt market as other avenues dried as well as for the significantly low borrowing cost.
With cash rich vaults and lower borrowing cost, CDS of banks and corporates trading in off shore markets eased from their October highs.
Swap market knows it all: Steep fall in swap rates by ~500bps to sub-5% levels factoring in further rate cuts and buoyant cash conditions.
Dual fiscal blow: Additional spending led to additional borrowing; total government borrowing for FY09 touched INR 2.15 tn (budgeted INR 1.45 tn).
Shortfall to surplus: In a matter of three months, CRR injected 1.6 tn; from a shortfall of INR 1 tn in October 2008 we have ~INR 0.5 tn in LAF reverse repo.
Lazy banking: Funds flow to greener (safer) pastures. Risk aversion by banks has induced them to prioritize SLR (risk free) investment over corporate lending.