Market may edge higher on fall in oil prices

The market may edge higher following a sharp fall in oil prices. However, subdued trend in Asian stocks may cap gains. Traders may refrain from building large positions ahead of a market holiday tomorrow, 3 September 2008. The market remains closed tomorrow on account of Ganesh Chaturthi.

Oil extended losses toward $111 a barrel on Tuesday, 2 September 2008, after Hurricane Gustav eased before slamming into the US Gulf Coast, pushing up the US dollar to a 7-month high against the euro and causing a broad sell-off of commodities.

Asian stocks were mostly in the red today, 2 September 2008. Key benchmark indices in Hong Kong, China, South Korea, Singapore and Taiwan were down by between 0.04% to 1.62%. Japan’s Nikkei was up 0.5%. US markets were closed on Monday, 1 September 2008, for Labour Day holiday.

As per provisional data released by the stock exchanges, foreign funds on Monday, 1 September 2008, sold shares worth a net Rs 241.85 crore. Domestic funds bought shares worth a net Rs 82.62 crore.

Equity mutual funds are sitting on large cash pile and the market may find support once mutual funds start deploying the idle cash. Equity funds are having 11% of assets in cash.

The market ended with small losses on Monday, 1 September 2008, staging a smart comeback from an intra-day fall. BSE Sensex lost 66.02 points or 0.45% at 14,498.51, recovering from an intra-day fall of 283.43 points.

Two biggest concerns which are weighing heavily on the stock markets are slowing economic growth and high inflation. Concerns on the inflation front had eased a bit last week when data showed inflation had softened for the first time in 28 weeks. The inflation trajectory suggested one more round of rate hikes before the central bank halts its current cycle of tightening, Kotak Securities said in a recent report. Inflation remains far above central bank’s target level of 7% towards the year ending March 2009.

In Annual Report for 2007-08 released after trading hours on Friday, 29 August 2008, the Reserve Bank of India (RBI) said inflation rates have hardened beyond tolerable levels and the monetary policy will continue to address aggregate demand pressures, which appear to be strongly in evidence. The central bank also said it had to ensure that the effectiveness of monetary policy was not diluted by fiscal expansion.

Concerns about populist measures by the government and their adverse impact on fiscal deficit will continue to haunt the bourses in the coming months ahead of the parliamentary elections which must be held by May 2009. Recently, the government approved an average 21% pay rise for central government employees and military personnel, the first revision of government salary scales in 12 years.

RBI sees several risks to growth prospects of the economy in the short term, stemming from both global and local factors. India's gross domestic product (GDP) grew 7.9% in the June 2008 quarter from a year earlier, easing from the previous quarter's 8.8% rise as industrial activity slowed due to monetary tightening, data released by the government during trading hours on Friday, 29 August 2008, showed.

As per a recent report by Goldman Sachs, the outcome of the southwest monsoon is key as 60% of India’s labour force is engaged in the agricultural sector and it has big knock-on effect on industry and services. The monsoon rains between 1 June 2008 to 24 August 2008 were near normal at 1% below the long-term average.

Meanwhile, the market will closely watch developments on the Indo-US nuclear deal. A crucial two-day meeting of the Nuclear Suppliers Group (NSG) begins in Vienna on Thursday, 4 September 2008. India on Friday, 29 August 2008, made it clear that it will only accept a clean waiver without any conditions from the cartel that controls global export of nuclear fuel and know-how.

All 45 members of NSG must approve the nuclear accord, which the US Congress must also pass for the deal to come through. The last meeting of the NSG, held in Vienna on 20 August 2008-21 August 2008 ended on an inconclusive note with some countries in the NSG raising objections about some aspects of the India-US civil nuclear deal that they suspect can adversely affect global non-proliferation regime.