RBI may cut rates - market may move up

Selling by foreign funds and weakness in Asian stocks caused by prospects of a deep global recession may pull the market further lower. However, speculation that the Reserve Bank of India (RBI) may announce steep rate cuts in a week or so to shield the domestic economy from the global economic slowdown, may trigger bargain hunting.

Fears of a global recession, slowdown in the domestic economy and selling by foreign funds pulled the Sensex down 1,598.96 points or 15.17% in the last five trading sessions to 8,937.20 on Tuesday, 18 November 2008 from 10,536.16 on 10 November 2008.

Foreign funds are dumping stocks in Indian and other emerging markets to shore up resources to beat the global liquidity crunch. As per the provisional data released by the stock exchanges, foreign institutional investors (FIIs) sold shares worth a net Rs 441.59 crore on Tuesday. FII outflow reached Rs 52,243.40 crore in calendar 2008, so far, till 17 November 2008, as against an inflow of a huge Rs 71,545.90 crore in the corresponding period last year.

Asian stocks dropped as fears of a global recession persisted. Key benchmark indices in Hong Kong, Japan, South Korea, Singapore and Taiwan were down by between 0.35% to 3.26%. But China bucked the trend with the Shanghai Composite index surging 2.4%. Market players were also spooked after US automakers gave a dire warning to lawmakers about their outlook while pleading for $25 billion of bailout funds from Congress.

The US housing market collapse at the heart of the crisis showed signs of deteriorating further, with the National Association of Home Builders index plunging to a record low of 9 in November 2008. Japan's recession could last even longer than feared, the country's economy minister warned today, 18 November 2008. Japan slid into its first recession in seven years in the third quarter as the financial crisis curbed demand for Japanese exports, data on Monday, 17 November 2008 showed.

Citigroup Inc, the No. 2 US bank, on Monday, 17 November 2008, said it would cut 15% of its global workforce or 52,000 jobs, far more than had been expected.

The slide in Asian stocks was despite overnight gains in US stocks. US stocks staged a late fight back on Tuesday, 18 November 2008, after a choppy session in which stronger-than-expected results and outlook from computer maker Hewlett-Packard offset fears that more losses at Citigroup and other banks are yet to come. The Dow Jones industrial average rose 151.17 points, or 1.83%, to 8,424.75. The Standard & Poor's 500 Index .SPX gained 8.37 points, or 0.98%, to 859.12. The Nasdaq Composite Index added just 1.22 points, or 0.08%, to 1,483.27.

Closer home, the Reserve Bank of India (RBI) is expected to announce another round of rate cuts in a week or so in an effort to ease liquidity and reduce borrowing costs to counter slowing economic growth. The RBI is also likely to create a special repo window to allow banks to borrow up to 100 basis points of the statutory liquidity ratio (SLR) — the percentage of deposits invested in government securities — to make available Rs 40,000 crore for infrastructure like national highway projects.

Oil was steady at $54.34, near a 22-month low, on mounting worries about a deep global economic recession, highlighted by data overnight showing confidence at US home builders plunging to a record low.

The rupee opened lower, as weaker Asian equities raised concerns of foreign fund withdrawals from the local stock market. At 9:05 IST, the partially convertible rupee was at 49.72/74 per dollar, after opening at 49.73. It had ended at 49.66/67 on Tuesday. The rupee had hit a record low of 50.29 late last month.