Market Close: sell off for third session...but what next ?

Markets suffered yet another sell-off on back of CRR hike reported yesterday, with this effect banking stocks came under pressure and witnessed heavy selling. Selling was seen across the board but Auto and Banking had blood bath. The sessions were extremely volatile for the day. Market recovered at the closing session largely on back of gains in Cement and Telecom counter. Market is heading towards major events...first in line is F&O settlement followed by Budget. When inflation concern hangs around the economy and Budget is scheduled ahead investors prefer to play safe. The case is no different at present. The volumes were not exciting as it is always and conditions are expected to remain same till the inflation worry and Budget is over. Expect market to trade range and volatile ahead.

Sensex was down by 81 points at 14009. Weighing on the Sensex were losses in SBI (1101.25,-6 percent), HDFC Bk (1016.65,-5 percent), ICICI Bk (915,-4 percent), Maruti (857.4,-4 percent) and Grasim (2655.8501,-3 percent). Losses were restricted by gains in Hindalco (146.4,+3 percent), Bharti Tele (760.9,+3 percent), RCVL (451.3,+2 percent), Wipro (650.45,+2 percent) and ONGC (900.1,+2 percent).

Banking stocks ended in red. The hike in the cash reserve ratio by the Reserve Bank of India took its toll on Banking and other related stocks down. The hike will lead to increase in corporate loan rates, home loan rates, auto loans and rates for personal loans. The central bank said the cash reserve ratio will rise to 6 per cent from 5.5 per cent in two stages, the first on 17 February 2007 and the second on 3 March 2007, to rein in inflation and credit growth. Major loser were SBI (-6.2%), HDFC (-5%) and ICICI (-4%). However we feel that markets had already priced in a large part of the negatives from inflation in the last two days and hence there is a feeling that it may be the bottom of the fall already. However there are two issues which are of concern. Coming within 2 weeks from the credit policy where this could have been done. It leaves a taste that the RBIs feel on the economy was not right. Secondly the extent of the hike at 50 basis points really implies that a panic button has been pressed.

FMCG sector traded mixed. According to a leading business daily, unexpectedly heavy winter rains in India's wheat-growing states have raised hopes of a better harvest. As the government formally banned wheat exports for the rest of the year. Announcement of the ban was posted by the government on Wednesday. India, the world's second-largest wheat producer, exported no wheat last year after shortages forced it to import wheat for the first time in six years but did not declare a foreign sale ban. The jump in prices of essential goods, such as wheat, has been a significant factor in pushing India's inflation to a more than two-year high of 6.58 %. Wheat prices alone have risen by 11.74 % year-on-year. The cost-of-living has become a key issue for the Congress-led government, which is facing a slew of state elections this year. The government has called the wheat supply crunch as a temporary event and says there is no danger to the green revolution in which use of US hybrid seeds led to bigger yields and food independence for the world's second most populous nation. Until unless Government takes corrective measure to increase production, it is difficult to maintain the demand and supply curve. Britannia was the major gainer here today as Govt. announced ban on wheat exports. The wheat prices may not come down in near term but the Britannia and its compititor has reduced the size of the pack (keeping at same price) so as to offset the high wheat prices impact. We are positive on this one.

Technically Speaking: It was a volatile session for the whole day. Sensex touched intraday high of 14036 and low of 13805. Sensex has formed a hammer on the daily charts and Nifty futures have also closed in a high premium in recent times. All indicates that we are going for a pul back rally which could move up to 14400-14500. Volume was low at Rs 3998 cr. Overall breadth was in favor of Declines. The Resistance lies at 14113-14190 lies while Support at 13882-13728 levels.