Bailout package to dictate trend

Key benchmark indices are likely to take cue early next week from the likely announcement of a fiscal stimulus and interest rate cuts on Saturday, 5 December 2008.

The stimulus package would add up to around Rs 75,000 crore, including use of up to $10 billion of foreign exchange reserves for funding infrastructure projects, lines of credit to banks and allowing non-banking financial companies to access foreign loans, reports suggest.

The Reserve Bank of India (RBI) may come out with cuts in repo rate and reverse repo rate to stimulate growth after inflation slipped to a 7-month low in the week ended 22 November 2008. Lower interest rates may help revive demand over the medium term.

Inflation based on the wholesale price index rose 8.4% in the year through 22 November 2008, lower than previous week's 8.84% rise, data released by the government on 4 December showed.

As per the market buzz, the RBI is expected to cut repo and reverse repo rates to the extent of 200 basis points and 125 basis points respectively. Repo rate is the rate at which RBI lends to commercial banks and reverse repo rate is the rate at which RBI accepts deposits from banks.

The RBI has aggressively cut rates over the past two months to support growth and cushion the economy against the spreading global turmoil. The repo rate has been cut by 150 basis points to 7.5% since October 2008 and the cash reserve ratio was reduced by 350 basis points to 5.5%.

Also, external commercial borrowing norms may be relaxed to allow industry to source funds outside the country and excise duty cuts are also on the cards.

However concerns about the weakening global economy and tension between Indian and Pakistan following terror attacks in Mumbai late last month, may keep the market sentiment edgy. Tension between India and Pakistan have mounted after the Mumbai attacks. India has blamed Islamist militants based in Pakistan for the attacks.

Meanwhile, economic, corporate and industry data continues to be weak in major economies. Japan said on Thursday, 4 December 2008, it may be in a deeper recession than first thought, in the latest signal that the global economic downturn is sparing few corners of the world. Earlier, a corporate survey in Japan signaled the country's economic performance in the third quarter may have been even worse than first reported. Australia's vehicle sales slumped in November 2008.

Closer home, the brokerages are downgrading their earnings estimates for Indian firms due to a plunge in demand. Foreign brokerage CLSA has been steadily downgrading earnings estimates; since June 2008, estimates for Sensex FY09 EPS have been cut 15%, while for FY10, the cut is 23%. Local brokerage Motilal Oswal cut the Sensex EPS by 11% for FY09 to Rs 908 and by 16% for FY10 to Rs 1,061.

India's industrial production data for October 2008 to be released on 12 December 2008 will be keenly watched. As per reports, industrial production is expected to grow marginally or register a dip for the first time since 1994. The index had expanded 12.2% in October 2007.