Market may extend gains on rate cut hopes

Key benchmark indices may extend gains on on a likely second government stimulus to pump prime the ailing economy and on expectations of a further fall of key policy rates with the inflation rate dropping to a nine-month low. However, the market may be volatile as derivative contracts for December 2008 series expire on Wednesday, 24 December 2008. It will be a truncated trading week as the market remains closed on Thursday, 25 December 2008 on account of Christmas.

Buying by foreign funds this month has lifted sentiments. FIIs bought shares equities worth Rs 1626.90 crore this month, till 18 December 2008. However they were net sellers in calendar 2008, so far, as they offloaded shares worth Rs 52,690.90 crore.

In its second stimulus package to boost growth, the government is likely to provide sops to the automobile, housing and steel sectors, reports suggest. The committee of secretaries (CoS) on economic crisis is examining proposals like increasing the limit for low interest-rate housing loans from Rs 20 lakh to Rs 30 lakh, increasing the tax rebate on home loans, reducing car and two-wheeler loan rates by 2% (from the current 12-14%), increasing depreciation and ensuring faster disbursal of central value added tax (Cenvat) credit for the steel sector.

The new package could also include monetary measures such as cuts in the cash reserve ratio (CRR), and statutory liquidity ratio (SLR) by the Reserve Bank of India (RBI), after the inflation rate in the week ended 6 December 2008 dropped to a nine-month low of 6.84%, below the RBI's target of 7% for 2008-09. Lower rates may revive demand over a medium term.

Inflation had surged into double digits in early June this year after an increase in state-set retail fuel prices, and peaked at 12.91% on, 2 August 2008, the highest reading since annual numbers in the current data series became available in April 1995.

The RBI on 6 December 2008, announced a 100-basis point cut in the repo rate and the reverse repo rate each. 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 first stimulus package unveiled by the government on Sunday, 7 December 2008, involved Rs 20,000 crore in additional government expenditure, an across-the-board 4% excise duty cut amounting to Rs 8,700 crore and benefits worth Rs 2,000 crore for exporters.

Volatility is expected to rise as derivative contracts for December 2008 series expire on Wednesday, 24 December 2008. As per reports, rollover of Nifty positions from December 2008 series to January 2009 series stood at 23.2% as of Thursday, 18 December 2008.

A preliminary data on advance tax payments for December 2008 quarter reflects strong signs of a slowdown in the economy. The top 100 tax-paying companies in each of India's four major tax collection centres have reportedly paid 5-28% lower advance tax in the third quarter because of the current economic slowdown. Companies are required to pay three-fourth of their annual tax liability in three installments, by 15 June, 15 September and 15 December, depending on their annual profit projections. Advance tax payout is seen as a leading indicator of the performance of the company as it is based on its estimate of profit for the full year.

Lower advance tax receipts might also put pressure on government finances at a time when it is trying to increase spending to revive demand.

Meanwhile, uncertainty about the fate of the struggling US automakers may keep global markets subdued. While US president George W Bush reportedly said the government is looking at all options for the troubled US auto giants and wanted to move in an expeditious way, Treasury Secretary Henry Paulson offered mixed signals on the chances of a bailout for troubled US automakers, saying failure is not an option but adding that any bankruptcy should be orderly.

The big 3 US automakers -GM, Ford and Chrysler have warned that without a financial aid, millions of jobs could be lost, which will add further problems to the faltering US economy. The automakers have been looking at $14 billion package from government to help weather the crisis.