Fears of further rise in interest rate continue to haunt bourses

The market today snapped last two days' winning streak as data showing a surge in inflation to a seven-year high and weak European markets kept bulls in check. Sensex had gained 360.95 points in last two trading sessions supported by strong global cues and robust April 2008 industrial production data announced by the Indian government during trading hours on 12 June 2008.

After holding in green for a better part of the day, banking declined in late trade. FMCG, power, realty and metal stocks fell. Investors took shelter in small-cap and mid-cap stocks causing sharply rally in some of the stocks in this segment.

A near term trigger for the market will be corporate advance tax payments for the first installment which falls due on 15 June 2008. The income tax law requires a company to 15% the estimated tax liability for the year as advance tax in the first installment. The advance tax payment by the corporate sector will give a cue on Q1 June 2008 results.

Inflation based on the the wholesale price index rose 8.75% in the 12 months to 31 May 2008, above the previous week's annual rise of 8.24%, government data released today, 13 June 2008, afternoon showed. The reading is highest since 10 February 2001, when it was 8.77%.

European stocks drifted lower, trimming some of the previous session's gains as inflation worries remained high on investors' minds ahead of US consumer price data. Key benchmark indices in France, Germany and UK were down by between 0.41% to 0.89%.

In a relatively range bound trade, the 30-share BSE Sensex lost 60.58 points or 0.4% at 15,189.62. At the day’s low of 15,135.81, Sensex lost 114.39 points in mid-afternoon trade. At the day’s high of 15,337.10 Sensex gained 86.9 points in early trade.

The broader based S&P CNX Nifty was down 22.25 points or 0.49% at 4,517.10. Nifty June 2008 futures were at 4482.10, at a discount of 35 points as compared to spot closing of 4517.10.

The BSE clocked a turnover of Rs 5,827 crore today as compared to a turnover of Rs 6,233.42 crore on 12 June 2008.

NSE's futures & options (F&O) segment turnover was Rs 41,003.40 crore, which was lower than Rs 52,333.46 crore on Thursday, 12 June 2008.

The market breadth was positive on BSE with 1,445 shares advancing as compared to 1156 that declined. 77 remained unchanged. Among the 30 stocks from Sensex pack, 21 were trading in red.

The BSE Mid-Cap index rose 0.08% to 6,228.17 and BSE Small-Cap index was up 0.74% to 7,581.72. Both these indices outperformed Sensex.

BSE Consumer Durables index (up 1.74% to 3,981.55), BSE HealthCare index (up 1.19% at 4,494.02), BSE Bankex (up 0.26% at 7,056.24), BSE Capital Goods (up 0.25% at 12,019.16), BSE PSU index (up 0.11% to 6,528.94), BSE TecK index (down 0.18% to 3,381.05), BSE IT index (down 0.22% to 4,336.06) outperformed Sensex.

The BSE Realty index (down 2.59% at 5,670.23), BSE Metal index (down 2.08% to 15,185.92), BSE FMCG index (down 1.2% to 2,241.53), BSE Power index (down 1.08% to 2,627.73), The BSE Auto (down 0.45% at 4,129.79), BSE Oil & Gas index (down 0.58% to 9,917.01) underperformed Sensex.

India’s largest private sector firm by market capitalisation and oil refiner Reliance Industries declined 0.59% to Rs 2,268.30.

Healthcare stocks rose. India’s biggest drugmaker by sales Ranbaxy Laboratories rose 4.31% to Rs 566.90. The stock rose on heavy volume of 22.34 lakh shares on BSE. Drug maker Pfizer Inc may reportedly make a hostile bid for the 65% stake in Ranbaxy not held by its founders. Daiichi Sankyo Co., Japan's third-largest drug maker, had agreed on 11 June 2008 to buy a controlling stake in Ranbaxy for as much as $4.6 billion.

Pfizer's Indian arm surged 4.76% to Rs 620. Dr Reddy’s Laboratories (up 3.96% to Rs 728.55) and Biocon (up 1.34% to Rs 483.15) edged higher.

Rate sensitive realty stocks fell after last two days' gains. Indiabulls Real Estate (down 5.52% to Rs 373.15), DLF (down 3.61% to Rs 479.75) and Unitech (down 1% to Rs 187.25) edged lower.

Metal stocks declined. Steel Authority of India (down 1.81% to Rs 159.80), Sterlite Industries (down 4.27% to Rs 770.40), Hindalco Industries (down 1.27% to Rs 175.40) and Tata Steel (down 1.81% to Rs 841.35) edged lower. However India’s second largest aluminium producer by sales National Aluminium Company rose 1.89% to Rs 489.40.

Power stocks edged lower. Tata Power Company (down 4.87% to Rs 1,252.45), Reliance Infrastructure (down 2.5% to Rs 1,020.30), NTPC (down 1.23% to Rs 161.10) edged lower.

FMCG stocks declined. Hindustan Unilever (down 2.54% to Rs 226.55), ITC (down 1.25% to Rs 197.45) and Nestle India (down 1.12% to Rs 1,700) edged lower.

Bank stocks declined after data released today afternoon showed a surge in inflation to highest level in more than seven years. India’s largest commercial bank State Bank of India declined 0.38% to Rs 1,334.55. The asset-liability committee of State Bank of India (SBI), will be reviewing interest rates today following the latest RBI move to raise repo rate.

The Reserve Bank of India on Wednesday, 11 June 2008, hiked repo rate by 25 basis points to 8% with immediate effect in an effort to contain rising inflation.

India’s second largest private sector bank by net profit HDFC Bank declined 3.45% to Rs 1,123.35. India’s largest private sector bank by net profit ICICI Bank rose 3.03% to Rs 764.80.

India’s largest dedicated housing finance firm by operating income HDFC declined 1.78% to Rs 2,133.30. HDFC chairman Deepak Parekh said on Thursday, 12 June 2008, HDFC will take a decision on raising interest rates on home loans by end of this month. He said there was upward pressure on interest rates.

Tata Consultancy Services (up 2.16% to Rs 907.65), Tata Motors (up 1.74% to Rs 516.20), ONGC (up 1.21% to Rs 841.25), Bharat Heavy Electricals (up 2.79% to Rs 1,561.10), and ACC (up 0.31% to Rs 634.10), edged higher from Sensex pack.

Jaiprakash Associates (down 4.03% to Rs 178.70), Cipla (down 2.63% to Rs 211.30), Maruti Suzuki India (down 1.97% to Rs 721.85), Grasim Industries (down 1.27% to Rs 2,182.30), ITC (down 1.25% to Rs 197.45) edged lower from Sensex pack.

India’s third largest IT exporter by sales Wipro declined 1.09% to Rs 477.85. It is reportedly bidding for 12 contracts worth at least $100 million each as it seeks bigger clients.

India’ largest engineering and construction firm by sales Larsen & Toubro was up 0.25% to Rs 2,710.15. Due to unfavourable market condition, L&T has reportedly decided to delay the listing of its software business unit L&T Infotech to 2009-10. The firm had earlier decided to go for L&T Infotech's initial public offer in the second half of this fiscal.

Chambal Fertiliser and Chemicals clocked the highest volume of 2.8 crore shares on BSE. Nagarjuna Fertiliser and Chemicals (1.78 crore shares), Reliance Petroleum (1.37 crore shares), Reliance Natural Resources (1.29 crore shares) and IFCI (1.26 crore shares) were other volume toppers in that order.

Reliance Capital clocked the highest turnover of Rs 269.58 crore on BSE. Anu’s Laboratories (Rs 261.64 crore), Chambal Fertiliser and Chemicals (Rs 248.3 crore), Reliance Petroleum (Rs 246.7 crore) and Reliance Industries (Rs 220.7 crore) were the other turnover toppers in that order.

Asian markets were trading mixed. Key benchmark indices in Hong Kong, China, South Korea, were down by between 0.99% to 3%. Key benchmark indices in Japan, Singapore and Taiwan were up by between 0.46% to 0.54%.

US stocks rose on Thursday after a stronger-than-expected May 2008 retail sales report and a $46 billion takeover bid for Anheuser-Busch from an overseas rival helped the market recover from a string of deep losses. The Dow Jones Industrial Average gained 57.81 points or 0.48% at 12,141.58. The tech-laden Nasdaq Composite Index gained 10.34 points or 0.43% at 2,404.35.

Oil was trading below $137 a barrel, near record highs of $139.12 hit last Friday, 6 June 2008.

Short covering by traders following improved industrial production data for April 2008 triggered a strong intra-day rebound on the bourses yesterday, 12 June 2008. The barometer index BSE Sensex gained 64.88 points or 0.43% to settle at 15,250.20, bouncing back from an intra-day 437.33-points fall.

The market’s concerns are that higher interest rates will raise borrowing costs and hit bottom line of corporates. Banks are likely to raise interest following a strong signal from the Reserve Bank of India (RBI) that banks' cost of funds is headed north when the central bank raised repo rate, a short term rate, by 25 basis points on Wednesday, 11 June 2008. The repo rate is the rate at which RBI lends money to banks under its liquidity adjustment facility.

The stock market’s another concern is that high interest rates may delay expansion plans of corporates which in turn may impact future earnings growth. A latest research report released by Lehman Brothers pointed out that the cost of borrowing is likely to increase further. According to Lehman inflation is unlikely to tread below 8% in 2008. Lehman expects another 25 basis points hike in repo rate in third quarter and a 100 basis points hike in banks’ cash reserve ratio (CRR) later this year.

A surge in global commodity prices led by crude oil spooked stocks across the globe in the past few days. In India, foreign funds have pressed heavy sales. FIIs sold shares worth a net Rs 5321.50 crore in the first few days of this month, till 11 June 2008. They had dumped stocks worth a net Rs 5011.50 crore in May 2008. Their outflow in calendar 2008 reached Rs 20690.90 crore, till 11 June 2008. There has been heavy buying by domestic funds led by insurance firms in the past few days, but that has failed to stop the slide on the bourses.

India’s economic growth has slowed down as fall in consumer demand caused by rise in interest rates. Industrial output rose 8.1% in 2007/08 (April-March) compared with 11.6% growth in 2006/07.

According to a report on the Indian economy made at the beginning of this month by Morgan Stanley, weak consumption growth and slowing business investment will slow India’s gross domestic growth (GDP) growth to 6.7% in the quarter ending March 2009 from 8.8% growth in the quarter ended March 2008. It, however, states that, on a long-term basis, an interplay of three key macro factors viz. favourable demographics, continuation of economic reform process by the government, and globalization, justify a gradual speeding up in India’s pace of growth.

According to a recent monthly June 2008 strategy report by HSBC Global Research, a possibility of Left parties withdrawing support to the government at the centre over the fuel price hike issue, cannot be ruled out. In such an environment with prospects of mid-term polls, the stock market is likely to remain nervous, HSBC says. Parliamentary elections are due in India in May 2009. The Union government on Wednesday, 4 June 2008, raised retail petrol and diesel prices by about 10%, more than expected, to help curb losses at its state-owned refiners arising from surging global crude oil prices.