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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