Market to extend gains

The market may extend Thursday's (4 December 2008) solid gains on expectations of a stimulus package from the government and the Reserve Bank of India (RBI). However, Indo-Pak tension after the major terror strikes in Mumbai last week, will cap the upside.

The BSE Sensex rose 5.5% on Thursday to its highest close in more than two weeks as expectations for an interest rate cut received a boost from slower-than-expected rise in inflation. As per the provisional data released by the stock exchanges, foreign funds bought shares worth a net Rs 307.14 crore and domestic funds purchases shares worth a net Rs 79.24 crore on Thursday.

As per the market buzz, the Reserve Bank of India (RBI) is expected to cut repo and reverse repo rates to the extent of 200 basis points and 125 basis points respectively on Saturday, 6 December 2008, in an attempt to shield the domestic economy from the global economic slowdown. 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.

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 Thursday, showed. 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.

Meanwhile, the Indian government is slated to announce a slew of measures on Saturday to pump prime the economy. The likely measures include a Rs 2000-crore export package, a further relaxation in external commercial borrowings norms and Rs 15,000-crore budgetary support for infrastructure.

The Indian government is reportedly considering various options including a strike on Pakistan to dismantle its terror bases in response to the recent Mumbai terror attacks. As a strike on Pakistan could lead to a full scale war between the two nuclear armed countries, India is maintaining a cautious approach and wants to gauge every possible ramification of its decision, reports suggest.

Tension between India and Pakistan have mounted after the Mumbai attacks. India has blamed Islamist militants based in Pakistan for the attacks.

Asian stocks were mostly in the green on Friday, 5 December 2008 following record rate cuts by central banks in Europe. But caution prevail ahead of what is expected to be dismal US employment data due later in the day.