Strong Q3 results, FII buying, steady Fed boost bourses

The market edged higher, last fortnight, on buying in pivotals following strong Q3 December 2006 results.

The rally accentuated after the US Federal Reserve, on 31 January 2007, kept interest rates unchanged at 5.25%, and abstained from voicing new concerns about inflation. Another sentiment booster came at the same time when the Reserve Bank of India (RBI) raised its FY 2007 GDP growth forecast at its monetary policy review on 31 January to 8.5% to 9% from earlier 8%.

The 30-share BSE Sensex gained 221.06 points or 1.55% to settle at 14,403.77 in the fortnight ended 2 February 2007. Sensex’s closing of 14,403.77 on 2 February 2007 was its lifetime closing high. The S&P CNX Nifty added 93.35 points or 2.2% to settle at 4,183.50 in the fortnight. Nifty also struck lifetime closing high on 2 February 2007.

Consolidation was seen in small-cap and mid-cap shares after a solid surge in their prices during mid-December 2006 and mid-January 2007. The BSE Small-Cap Index gained ended flat in the fortnight at 7,560.72. The BSE Mid-Cap Index gained 42.68 points or 0.7% to 6,118.20 in the fortnight.

A sell-off in cement shares pushed the Sensex down 168 points on 23 January 2007. Cement stocks plunged after the Centre lifted import duty on all varieties of cement except for white cement. Correction in banking sector stocks also added to the downward pressure on the Sensex and the Nifty. There was also some significant squaring up of long positions in the derivatives segment a day before the expiry of contracts.

A pronounced rally materialized on 25 January 2007 due to short-covering in derivatives ahead of expiry of January 2007 derivatives contracts. The Sensex surged 172.26 points on the day, to close at 14,282.72, a lifetime closing high. Nifty put up 57.80 points, to close at 4,147.70, an all-time closing high.

Sensex lost 70.76 points on 29 January 2007 as interest rate sensitive banking shares weakened in the latter part of trading due to concerns of a rate hike ahead of RBI’s monetary policy review of 31 January 2007. IT shares were subdued-to-weak throughout the day. Nevertheless, index heavyweight Reliance Industries did offer some support to the Sensex by holding strong.

RBI’s decision in its monetary policy review to increase provisioning requirement of banks for capital market loans to 2% from 1%, which is likely to result in an increase in credit rates for capital market loans led to a 121 point fall in the Sensex on 31 January 2007. The central bank raised a key short-term interest rate, the repo rate, by 25 basis points, which was in line with market expectations. It also raised its FY 2007 GDP growth forecast to 8.5% to 9% from earlier 8%. Tata Steel was a major loser on the day, crashing 10.65% after clinching the Corus deal, at a valuation deemed expensive by the market. Metal stocks across the board lost the same day.

Sensex spurted 176 points on 1 February 2007 tracking firm global markets, which were boosted by the US Federal Reserve’s decision to keep interest rates steady.

Telecom stocks led Sensex’s 137 points rally on 2 February after telecom regulator Telecom Regulatory Authority of India (TRAI) decided to lower port charges that allows cellular operators to connect to BSNL and MTNL lines by up to 29%, a move which is expected to result in tariff cuts. Firm Asian bourses once again support domestic bourses on that day.

Quarterly outcomes were strong. Reliance Industries (RIL), ONGC, Ranbaxy Labs, Dr Reddy’s Lab, Steel Authority of India, Tata Steel, ITC, Bharti Airtel, Bharat Heavy Electricals (Bhel), HDFC and ICICI Bank reported good results. However, Bajaj Auto, State Bank of India and Maruti Udyog disappointed.

FII inflow in January 2007 totaled Rs 492.10 crore. FIIs pressed heavy sales worth Rs 4550.70 crore in three trading sessions from 8 January 2007 to 10 January 2007. In a single trading session on 8 January, they pulled out a net Rs 3076 crore. The huge sales apparently included shares tended by FIIs in Oracle’s open offer for acquiring additional shares of i-flex. Oracle’s open offer for i-flex got over in late December 2006. After the huge three-day outflow, FIIs resumed buying later.

There was substantial selling by mutual funds from the middle of the month. Mutual funds’ withdrawal for January 2007 aggregated Rs 1342 crore

Global ratings agency Standard & Poors (S&P), on 30 January 2007, raised India's sovereign local currency credit ratings to investment grade BBB-/A-3, with a stable outlook, citing strong economic prospects and an improving fiscal situation. A lot of funds, for instance, pension funds in foreign countries, which were not allowed to invest in Indian equities hitherto, will now become eligible to purchase Indian equities. The development can be instrumental in the stock market’s further rally.

With the results season over, the near term trend on the bourses will be driven by expectations regarding the Union Budget 2007-08. Market men expect the budget to give big thrust to agriculture and infrastructure. There are also expectations that surcharge on corporate tax would be abolished.
Meanwhile, there has been a flurry of IPOs from the beginning of the New Year. A large amount of money will be raised from the primary market in the coming months. Real estate major DLF Universal has already filed a fresh draft red (DRHP) herring prospectus with Sebi in what would be the largest ever IPO by an Indian firm