On the global front, China on Friday announced a further easing of its monetary policy to stimulate the world’s second- largest economy. (Express photo)

Stock markets may see volatile sessions ahead of the derivatives expiry due on Thursday, and the next set of quarterly earnings from blue-chips such as Bharti Airtel, HDFC, Maruti Suzuki and ICICI Bank will dictate trend on bourses, say experts.

Stock-specific movement will continue due to the prevailing earnings season. Bharti Airtel, HDFC, Axis Bank, Lupin, Maruti Suzuki India, Vedanta and NTPC will bring out their earnings numbers this week.

“Apart from quarterly earnings, markets will remain volatile as traders will roll over positions in the derivative segment. Any new development from Bihar election will add volatility to the markets,” said Vijay Singhania, Founder- Director, Trade Smart Online.

Besides, investment trend by foreign investors, movement of the rupee against the dollar and crude oil price will also help set the tone, experts said.

“The October series F&O expiry will also contribute its bit to volatility. Furthermore, considerable stock-specific action will be witnessed as stock valuations align with the actual results delivered by companies for the September quarter in the ongoing earnings season,” said Hitesh Agarwal – Head Research – Reliance Securities.

Over the past week, the benchmark Sensex ended at 27,470.81, a gain of 256.21 points, or 0.94 per cent. Markets ended in the green for the fourth straight week.

“Market will wait for Bihar election results before any substantial move,” said Jimeet Modi, CEO, SAMCO Securities.

On the global front, China on Friday announced a further easing of its monetary policy to stimulate the world’s second- largest economy.

The surge in foreign flows into the Indian bond markets, poised to overtake flows into equities for the second consecutive year, is already driving down the cost of money.

The surge in foreign flows into the Indian bond markets, poised to overtake flows into equities for the second consecutive year, is already driving down the cost of money. Yields on gilts have already dropped by 15-18 basis points across tenures since the Reserve Bank of India (RBI) lowered the key repo rate by 50 basis points on September 29. On Friday, Rural Electrification Corporation (REC) priced its 10-year public issue of tax-free bonds at a coupon of sub-7%. Shashikant Rathi, executive vice-president, investments, at Axis Bank, said this was a clear indication yields were headed down. “This is the first time in probably three years that the coupon on corporate paper in the form of a public issue is being priced at a coupon of sub-7%,” Rathi said.

Despite the cap on investments into debt, foreign flows into rupee bonds so far in 2015 are already twice as large as into equities. Bloomberg data show foreign portfolio investors (FPI) have invested $8.6 billion in the debt market as on October 20, with $2 billion pumped in so far this month after the RBI allowed additional investments into G-Secs and state development loans (SDLs).

According to Bank of America Merrill Lynch, Indian bonds still offer a relatively high real rate within the region and the rupee has been the best-performing currency this year adjusted for volatility. While yields on the benchmark bond were 7.61% on September 29, it dropped to 7.51% by October 5 and remains around those levels. The periodic incremental FPI flows are expected to sustain the demand for bonds with the benchmark yield tipped to move closer to levels of 7.3-7.4% by March next year.

In contrast, equity inflows have been relatively subdued at $4.42 billion as a combination of local and external influences has prompted institutions to book profits. In 2014, FPIs invested $26.25 billion in rupee bonds compared with $16.16 billion in stocks, Bloomberg data show.

The first tranche of the auction for G-Sec limits in October, after the RBI’s policy announcement, attracted unprecedented response. The bid-to-cover ratio was almost 1:3, wherein investment limits worth R5,600 crore saw bids worth R17,200 crore. The cut-off premium was set at 66 basis points with the highest bid at 85 basis points, indicating a willingness to pay 85 paise for every R100 worth of bonds. At the previous auction in September the cut-off was 53.01 basis points while the top bid was 70 basis points.

Additionally, investors bought Rs 1,000 crore of bonds issued by state governments, using up nearly 27.6% of the upper limit of Rs 3,500 crore on the first day itself, suggesting comfort with state government paper. Subsequently, over the next few days, the entire quota was subscribed to.

Bankers believe FPI appetite for Indian paper will remain robust and that any unutilised G-Sec limits will be fully used up as and when available. At its September 29 credit policy meeting, the central bank had announced an increase in the FPI limit in G-Secs to 5% of the outstanding stock by March 2018, thereby opening up an additional R1.2 lakh crore ($18 billion) investment limit over the next two and a half years, over and above the existing limit of R153,500 crore.

These investments would occur in tranches over the stipulated time frame. Each tranche would entail an increase in limits by R13,000 crore for central government securities, of which R7,500 crore will be for long-term investors and R5,500 crore for others, according to RBI’s September credit policy statement.

Moreover, a limit of R3,500 crore in SDLs will also be opened up for all FPI investors. FPIs have also been permitted to invest in SDLs, which will be increased in phases to a figure of 2% of the outstanding stock by March 2018. This would amount to an additional limit of about Rs 50,000 crore.

The increase for the current financial year is taking place in two tranches in October and January 2016, amounting to Rs16,500 crore (nearly $2.5 billion). Over a period of the next two and a half years, FPI investment limits into G-Secs and SDLs will be close to double the current figure of $30 billion allowed in G-Secs. As of October 21, the quota for corporate bonds of Rs 2.44 lakh crore has been used up to the extent of 76.62% as on October 21.

Meanwhile, German investment banking firm Deutsche Bank advised equity investors to stay defensive till emerging market currencies stabilise. “We believe that global macro factors will predominate investor sentiment. Even the RBI’s action in the next credit policy will be determined by global macro factors, particularly the environment for capital flows in EMs and further actions from the PBOC and the Fed. Investors should be looking out for stabilisation of emerging market currencies and bond spreads, before drawing any comfort on buying beta. Markets will stay unsettled until there is clarity on what the Fed is likely to do,” Abhay Laijawala, MD and head of research, Deutsche Equities (India), said.

Mutual Funds say in a debt fund, overall performance should be seen

Various mutual funds continue to have substantial exposure to debt papers of companies that have either witnessed a downgrade in credit ratings or revision in credit outlook so far in 2015-16.

Data compiled by Value Research shows that as of August 31, several debt schemes had significant holdings in Jindal Steel & Power, Hindalco, Vedanta, and Magma Fincorp — companies that have faced rating downgrades to their long- or short-term debt instruments in the past six months by at least one of the leading rating agencies including Care, Crisil and Icra.

Moreover, their holdings in debt instruments of companies such as SAIL, DLF, Tata Teleservices, Bank of Maharashtra and Bank of India, for which the credit outlook has been lowered in the previous six months, remain substantial.

On their part, fund houses argue that similar to a equity scheme, the range of debt papers under one particular scheme could be diverse and does not solely reflect the risk profile of the scheme itself.

According to Rahul Goswami, CIO of fixed income at ICICI prudential Asset Management Company, upgrades and downgrades are part of life for mutual funds which invest in corporate bonds. They are like upward and downward movement of share prices for equity funds.

“Hence, just like in an equity fund, the overall performance of the portfolio is looked at, similarly in a debt fund one should look at the overall fund performance,” said Goswami.

However, since credit downgrade of Amtek Auto by rating agencies led to a sharp decline in net asset value (NAV) of two of the debt schemes of JP Morgan AMC in late August, the credit profile of Indian companies, especially from the troubled commodity and investment-linked sectors, has been in focus.

While it was reported that after the Amtek Auto debacle, the Securities and Exchange Board of India (Sebi) asked JP Morgan AMC to present their books to examine the systems followed for investments in Amtek, there were also reports that the market regulator asked various AMCs to provide information on their exposure to Jindal Steel & Power after rating firm Icra had lowered the company’s rating.

Data shows that 46 mutual fund schemes, including several fixed maturity plans (FMPs), held exposure to various debt instruments — commercial papers, debentures and structured obligations — of Jindal Steel & Power as of August 31, with maturities ranging from November 2011 to March 2021.

All AMCs FE approached, while declining to comment on specific holdings of their schemes, argued that security selection in debt schemes follows a bottoms-up approach and a multi-layered in-house credit process besides considering grading by credit rating agencies as inputs.

As such, metal companies have seen higher downgrades this fiscal and while all the dozen revisions do not signify any serious problem, the number of ratings and outlook downgrades reflects the weakening financial of companies.

Compilation of FE shows that at least 29 and 60 schemes held debt securities of Hindalco and Vedanta, respectively, with maturity from 2016 onward. Crisil lowered long-term credit ratings of these companies to AA- and AA in April this year.

According to a spokesperson of Franklin Templeton Investments, every sector will have both strong and weak companies, and it is wrong to paint every company with the same brush. “Generally speaking, the overall credit environment in India is improving with numerous rating upgrades in the past one year and if one were to analyse our bond fund portfolios; the number of upgrades in the last year is substantially higher than the number of downgrades,” the spokesperson said.

More metals producers could be downgraded, said analysts, as they see several steel producers reporting negative operating cash flows in FY16, with around half of steel producers reporting loss in the three months to June 2016.

Acknowledging that the deterioration in credit parameters in the metals space is on account of high leverage and a weak cycle, Akhil Mittal, senior fund manager, Tata Mutual Fund, said the AMC is vigilant on the sector. “ We also take note that issuers have undergone through a lot of stress and balance sheet deterioration although further stress cannot be completely ruled out.”

AMCs said their rating strategy also give weight to the track record of promoters and parent companies of a business. They are drawing comfort from the fact that companies such as SAIL, Bank of Maharashtra and Indian Overseas Bank are owned by the government or entities like Vedanta and Hindalco have cash-making subsidiaries or established promoter group.

Idea Cellular share price declined over 6 per cent on Friday after the company’s second quarter earnings failed to cheer investors. (Photo: Reuters)

Idea Cellular share price declined over 6 per cent on Friday after the company’s second quarter earnings failed to cheer investors.

At 1.33 pm, the shares were down 6.46 per cent at Rs 141.80 on BSE. On NSE, the shares were down 6.62 per cent at Rs 141.85. The BSE Sensex was trading 199.43 points up at 27,487.09 during the same time. The stock was the top loser on NSE’s 50-share Nifty.

Idea Cellular on Wednesday reported a 7 per cent increase in net profit at Rs 809.26 crore for the July-September quarter, helped by non-voice revenue growth.

The company, however, witnessed a decline in voice usage and pressure on mobile data.

Idea, part of the Aditya Birla conglomerate, had reported a net profit of Rs 755.88 crore for the second quarter of the last fiscal.

Total revenue rose to Rs 8,689.06 crore for the reported period as against Rs 7,569.92 crore a year ago, Idea had said in a statement.

It said voice minutes usage declined to 189.5 billion for the quarter under review compared with 195.8 billion in the preceding three months (April-June of 2015-16).

On a sequential basis, Idea’s net profit declined to Rs 809.3 crore in the reported period from Rs 930.8 crore the previous quarter while total revenue was down to Rs 8,689.1 crore from Rs 8,798.3 crore.

With PTI inputs