RBI’s monetary policy review to set direction

Volatility may rule the roost on the bourses next week. The Reserve Bank of India (RBI)’s monetary policy review, futures & options expiry for July 2008 series, progress of monsoon, and results of key index pivotals will dictate the trend.

Soaring inflation which is hovering near 13-year high has been a key concern for the financial markets. Inflation has consistently stayed above the Reserve Bank of India (RBI)’s tolerance level of 5.5% set for the current fiscal. The Reserve Bank of India (RBI) is set to review the monetary policy on 29 July 2008. Marketmen opine that RBI may further hike short-term interest rates or the repo rate as well as statutory deposit requirements or the cash reserve ratio (CRR). RBI had increased short-term lending rates for banks and CRR by 0.5% each on 24 June 2008 to control surging inflation.

The wholesale price index (WPI)-based annual rate of inflation stood at 11.89% for the week ended 12 July 2008, marginally lower than the 11.91% reported in the previous week. The annual inflation rate was 4.76% during the corresponding week last year.

Volatility may remain high ahead of the expiry of futures & options contracts for July 2008 series on Thursday, 31 July 2008.

The progress of the monsoon will also be watched very closely, as it will influence the GDP figures. Monsoon rains were 33% below average in third week of July 2008, according to Indian Meteorological Department. The cumulative rainfall after the onset of South West Monsoon has been 2% lower than the long period average (LPA). Rains in July account for a third of the four- month monsoon season from June to September and are crucial for sowing crops. Scant rainfall is bad news for the government, which is battling runaway inflation, which has surged to a 13-year high, largely due to a sharp rise in commodity prices.

There are expectations that the government may push forward some economic reforms which had been stalled over the past four years due to opposition from Left parties, after it won trust vote in parliament on Tuesday, 22 July 2008. Left parities had stalled privatisation of state-run firms, pension reforms, higher foreign limits in insurance and more liberal norms for foreign bank. The government has retained power thanks to support from regional parties including Samajwadi Party (SP), a regional party in Uttar Pradesh.

Some analysts, however, feel that a major big-bang push to reforms is unlikely as the government will focus primarily on bringing down inflation ahead of key state polls and parliamentary elections which are due in May 2009.

A sharp cooling off crude oil which touched record high of $147 per barrel early this month augurs well for the Indian economy. It is currently hovering at about $126 a barrel. Any sharp rebound in oil prices would dampen the sentiment.

Q1 earnings have been a mixed bag so far. A total of 482 companies reported 14.5% rise in net profit on 34% rise in net sales in Q1 June 2008 over Q1 June 2007. The overall earnings of the corporate sector are seen rising about 15% in Q1 June 2008 over Q1 June 2007. That would be well below the 20-25% growth seen over the past few years.

Larsen & Toubro, Sterlite Industries, Sun Pharma, HDFC Bank, Oil & Natural Gas Corporation, Ranbaxy Laboratories, Cairn India, NTPC, among the frontline companies will declare their June 2008 quarterly results in the forthcoming week.

Among other companies , Indian Overseas Bank, Wockhardt, Tata Communications, Sun TV Network, Mundra Port & Special Economic Zone, Tata Tea, Bharat Petroleum Corporation, Britannia Industries, Bank of India, Kotak Mahindra Bank, Bank of Baroda, Jet Airways, Punj Lloyd, Gail India, Hero Honda Motors, Neyveli Lignite and GMR Infrastructure, will declare June 2008 quarter results.