Market may fall tracking weak Asia

The key benchmark indices may extend last two days of losses tracking weak Asia. Investors will closely watch the first installment of advance tax figures of India Inc. to be announced today. This will be a major trigger for the market as it provides clue to the corporate earnings of India Inc in Q1 June 2009.

Most Asian stocks declined today, led by commodity companies, after metals and oil prices fell. Key benchmark indices in Hong Kong, Japan, South Korea, Singapore and Taiwan fell by between 0.67% to 2.86%. China's Shanghai Composite rose 0.24%.Foreign direct investment in China fell 17.8 % to $6.38 billion in May 2009 over May 2008 as companies cut spending to weather the worst economic slump since the Great Depression

It was a lacklustre session for the US markets on Friday, 12 June 2009. The benchmark indices closed flat on that day. In stock action, Bank of America shares rallied, but technology, energy and commodities retreated after crude prices slipped. The Dow gained 28.34, or 0.3%. Nasdaq shed 3.57 points, or 0.2% while the S&P 500 added 1.32 points, or 0.1% on a weekly basis too, the market closed with very modest gains.

Closer home, the government reportedly is considering a proposal to hike income-tax exemption available for interest payment on home loans to Rs 2.5 lakh a year, to boost demand and rebuild the slowdown-hit housing industry. At present, taxpayers taking housing loans are eligible for income-tax exemption on interest payment of up to Rs 1.5 lakh every year. Besides this, the repayment of principal amount is part of investments eligible for benefit under Section 80(C) of the Income-Tax Act, which has a ceiling of Rs 1 lakh.

As per reports, the upcoming Union Budget may bring some pleasant surprises for corporate India. Apart from doing away with the fringe benefit tax (FBT), the government is also considering removal of cess and surcharge on corporate taxes. Instead, the government may levy a common rate of direct tax on corporate income this fiscal onwards. Indian companies are charged a corporate tax of 30%, along with a surcharge of 10% and an educational cess of 2% on tax payable. As per the Finance Bill of 2007, the surcharge on income-tax was not levied on all firms with a taxable income of Rs 1 crore or less. The total tax payable, including surcharge and cess, stands at about 34% for a domestic company. The government is now looking to charge a single tax close to 34%.

Meanwhile, interest rates in India are falling thanks to ample liquidity in the banking system, low headline inflation and a loose monetary policy stance of the Reserve Bank of India. However, inflation may rise if oil and metal prices which have risen sharply in 2009 continue to rally.

Finance minister Pranab Mukherjee on last Wednesday said banks should provide credit at reasonable rates to spur growth, saying cuts in official rates by the Reserve Bank of India had not been passed on. This will help restore the environment for rapid growth and ensure that the growth process benefits, he said.

Indian stocks have soared in the past three months on a view that ample global liquidity and a return of risk appetite will help India Inc help raise funds for expansion which in turn will boost corporate profits. India Inc has already raised almost Rs 5,000 crore from three qualified institutional placements (QIPs) so far in 2009 and announced plans to raise another Rs 20,000 crore.

Many equity analysts have been raising earnings forecasts of India Inc on hopes that the new government will provide thrust on the infrastructure sector and push economic reforms to boost growth. Citigroup expects the economy to grow by 6.8% in 2009/10 and 7.8% in 2010/11.

A comfortable victory last month for the Congress-led United Progressive Alliance (UPA) government in elections for the 15th Lok Sabha has raised hopes for economic reforms. Reforms virtually came to a halt in the past five years of the Congress-led alliance government at the centre, when the Communists provided support to the government from outside for a large part of the five-year term. Left parties are opposed to economic reforms.

Foreign funds are aggressively buying in Indian stocks. As per the provisional figures on NSE, foreign funds bought shares worth Rs 469.35 crore on Friday 12 June 2009. FII inflow in June 2009 totaled Rs 5,595.40 crore (till 11 June 2009). FII inflow in calendar year 2009 totaled Rs 26,914.80 crore (till 11 June 2009).

On the back of heavy buying by foreign funds, the Sensex has jumped 5,590.63 points or 57.95% in calendar year 2009 to Friday, 12 June 2009. From a 3-year closing low of 8,160.40 on 9 March 2009, the Sensex has risen 7077.54 points or 86.73% to 12 June 2009.

Mutual funds, too, have started received fresh investor money after a solid surge in the stock prices in the past three months. Net inflows into domestic equity mutual funds rose to Rs 1,930 crore in May 2009, the highest in 14 months, and more than twice the amount in the first four months of 2009, according to data from the Association of Mutual Funds in India.

Finance minister Pranab Mukherjee on last Thursday said there was a need to find ways to bring the economy back to higher growth path without increasing the fiscal deficit. He said the government would focus on infrastructure, agriculture and employment generating sectors to protect growth and jobs.

But rising metal prices is a cause of concerns for manufacturing companies as their raw material costs may shoot up.

The government's oil subsidy bill may remain high and it could continue to put pressure on the already high fiscal deficit if the government does not resort to decontrol of oil prices. However, the surging rupee against the dollar may mitigate the impact to some extent as India is a major importer of crude.

Finance Minister Pranab Mukherjee on 26 May 2009 said that a sustained stimulus to economic growth is possible by next round of reforms. He said reviving growth momentum is a top priority for the government adding that fiscal prudence will also be kept in mind.

Investor expectations from the new government are high. Investors expect financial sector reforms such as increase in the cap on foreign direct investment in insurance sector to 49%, from 26% at present.

Unveiling the agenda of the government, President Pratibha Patil in her speech addressed to a joint session of both houses had last week indicated government's intension to divest stake in state-run firms. The government, however, intends to retain control over state-run firms and will continue to hold at least 51% stake. But some investors are concerned that the government's two key allies viz. the DMK and Trinamool Congress (TC) may oppose economic reforms.

Prime Minister Manmohan Singh on Tuesday said India will achieve an economic growth of at least 7% this fiscal and promised more resources for areas like infrastructure and public services. He said India will be able a growth rate of 8-9%, even when the world grows at a lower rate.

The Prime Minister said the reason behind his optimism was that India's savings rate, which determines the money that can be deployed for development projects, was still high at 35% of gross domestic product (GDP).

Manmohan Singh also sought to allay fears that pump priming of the economy by way of stimulus packages announced earlier and measures that will follow in the ensuing months would fuel inflation. "It (expenditure towards infrastructure) will not add to inflation, but to our economic growth."

According to the Prime Minister, fiscal deficit had increased sharply but even then India had enough resources to spend on flagship programmes thanks to the average annual growth of 8.6% achieved during the past five years. He also said that his government was deeply committed to the agenda listed in the President's address, adding flagship programmes will be further strengthened and public delivery system made more transparent.