Market may extend gains on firm Asia, buying by FIIs

The market may extend strong gains of the past few days on firm Asian stocks, resumption of buying by foreign funds and on reports that state-run banks are likely cut lending rates further next month. But concerns about Q3 results may keep a lid on prices.

Analysts widely expect dismal Q3 December 2008 results due to a sharp fall in demand, slowing economic growth and recession in major economies such as the United States, eurozone and Japan. The earnings parade will be kicked off by private sector lender Axis Bank on Friday, 9 January 2009, followed by IT bellwether Infosys Technologies on 13 January 2009.

Asia-Pacific stocks extended recent gains on Wednesday, 7 January 2009, on hopes for a US economic stimulus package. Key benchmark indices in Japan, Hong Kong, Singapore, South Korea, Australia and Taiwan were up by between 0.07% to 1.89%

US stocks gained on Tuesday, 6 January 2009, on the increased likelihood of a government stimulus package after the release of minutes from the last Federal Reserve policy meeting painted a dismal picture of the US economy. The Dow Jones industrial average was up 62.21 points, or 0.69%, to 9,015.10. The Standard & Poor's 500 Index gained 7.25 points, or 0.78%, to 934.70. The Nasdaq Composite Index added 24.35 points, or 1.5%, to 1,652.38.

US President-elect Barack Obama's proposed package of spending and tax-cut measures is estimated at nearly $775 billion over the next two years. Data released on Tuesday showed that pending sales of US homes dropped in November 2008 to their lowest level in at least seven years and that the country's services sector shrank for the third consecutive month in December 2008

Closer home, foreign institutional investors (FIIs) have resumed buying. As per provisional data released by the stock exchanges after trading hours, foreign funds on Tuesday, 6 January 2009, bought shares worth a net Rs 374.02 crore. Foreign funds had bought shares worth a net Rs 530 crore in three trading sessions from 1 January 2009 to 5 January 2009. After a sustained inflows earlier in the month in December 2008, FIIs had turned sellers towards end of that month.

Coordinated policy measures from the central bank and the government to boost sagging growth has boosted the bourses. The BSE Sensex jumped 1,007.01 points or 10.79% to 10,335.93 on 6 January 2009 from a recent low of 9,328.92 on 26 December 2008.

The Reserve Bank of India (RBI) on Friday, 2 January 2009, cut the repo rate and the reverse repo rate by 100 basis points each, with immediate effect. 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. After the latest cuts, the repo rate is now at 5.5% and the reverse repo is now at 4%, the lowest ever.

The RBI also announced a cut in cash reserve ratio, the proportion of deposits banks must keep with the central bank, by 50 basis points to 5% with effect from 17 January 2009. Lower interest rates may revive the domestic economy which has been slowing faster than expected due to high interest rates and the global financial crisis.

Complementing monetary easing by the RBI, the government enhanced the spending power of states with specific measures to boost credit availability in the second fiscal stimulus package. It offered additional sops to exporters and the small-scale sector, besides raising the level of protection for cement and steel sectors a tad. It has also incentivised purchase of commercial vehicles. Both the RBI and the government measures were announced after trading hours on Friday, 2 January 2009.

The rupee gained on Wednesday with a rise in regional stock markets offset by the dollar's strength against major currencies. At 9:10 IST, the partially convertible rupee was 48.48/49 per dollar, compared with Tuesday's close of 48.66/69.

Oil was steady under $49 on Wednesday, after weak US economic data sparked a bout of profit-taking overnight, outweighing escalating tensions in the Middle East and widening supply cuts from the Russian gas row. US crude for February 2009 delivery was up 6 cents at $48.64 a barrel Oil prices have risen nearly 50% since the intraday low of $32.40 reached on 19 December 2008, boosted by worries over supply disruptions from Israel's deepening incursion into Gaza, Russia's gas row with Ukraine, and mounting evidence of the Orgainsation of Petroleum Exporting Countries (Opec)’s compliance with production cuts.