Market may recover after steep slide

Hopes of further rate cuts by the central bank and a likely second government stimulus package to pump prime the economy may trigger a recovery on the bourses after a sharp slide last week. However, trading volumes are likely to remain low as most foreign fund managers are on a vacation for Christmas and the New Year. Domestic institutions may provide support to boost yearly net asset values.

The BSE 30-share Sensex lost 770.99 points or 7.63% to 9,328.92 in the week ended Friday, 26 December 2008.

Commerce Minister Kamal Nath on Wednesday, 24 December 2008, said the government is considering another stimulus package to lift slowing growth. The new stimulus package may include steps to ease liquidity and relief measures for export and housing sectors, the trade minister said. He also said the government is looking at possible duty cuts for more goods to stimulate demand in the economy.

The second stimulus package assumes importance as the industrial production fell 0.4% in October 2008, to move into negative zone after 15 years, while exports declined by 12.1% during the month.

The first stimulus package announced early this month mainly involved an across-the-board excise duty cut of 4% and an additional public expenditure of Rs 20,000 crore. In addition to the fiscal stimulus, the Reserve Bank of India through a slew of measures reduced the key ratios and policy rates, thereby releasing about Rs 3 lakh crore of liquidity into the system.

A sustained decline in inflation has raised expectations of a further cut in key policy rates by the Reserve Bank of India. Wholesale prices increased 6.61% in the year through 13 December 2008 lower than previous week's 6.84% rise, data released by the government on Friday, 26 December 2008 showed. The central bank's fiscal year-end target for inflation is at 7%.

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 had 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.

However, concerns over corporate earnings may cap gains. Weaker export numbers, lower excise collections and flagging industrial production data have raised concerns about a sharp moderation in growth. The government said on Friday, 26 December 2008, advance taxes paid by companies declined 22% to about Rs 42600 crore in the December 2008 quarter over the December 2007 quarter, reflecting economic slowdown.

Also there is now the lurking tension brewing on the geopolitical front with tensions escalating between India and Pakistan although Prime Minister Manmohan Singh and his Pakistani counterpart Yousuf Raza Gilani said there would be no Indo-Pak war.