Market to extend Monday's losses tracking sharp slide in global stocks

The key benchmark indices may extend Monday's losses tracking weak global stocks after the World Bank on Monday predicted that the global economy will shrink 2.9% this year, a deeper fall than the 1.7% contraction it predicted in March 2009. Recent selling by foreign funds may also weigh on investor sentiment. However, volatility may remain high ahead of the expiry of June 2009 futures and options (F&O) contracts on Thursday, 25 June 2009.

Asian stocks fell today, as concern an economic recovery will be delayed dragged commodity prices lower and spurred demand for the yen as a haven. The key benchmark indices in China, Hong Kong, Japan, South Korea, Singapore and Taiwan fell by between 1.77% to 3.55%.

The Wall Street suffered its worst day in two months on Monday, 22 June 2009 as markets closed deep in the red, the S&P 500 slipped below 900. Financials and commodities led the stocks down. Losses were further fuelled by news that the world bank cut its forecast for major economies like that of the US. The Dow slipped 200.72 points, or 2.4%, to 8,339.01. The S&P 500 index fell 28.19 points, or 3.1 %, to 893.04. The Nasdaq Composite Index fell 61.28 points, or 3.4%, to 1,766.19.

World Bank predicted on Monday that the global economy will shrink 2.9% in 2009, a deeper fall than the 1.7% contraction it predicted in March 2009. It also warned that international capital will continue to flow out of developing nations, with international capital flows projected to fall to $363 billion in 2009 from their peak of $1.2 trillion in 2007. The world has entered an era of slower growth that will require tighter and more effective oversight of the financial system, the bank said in a statement.

Even as the “world is entering an era of slower growth” and "deepening recession", India's economy is set to expand 5.1 % in 2009 and by 8.0 % in 2010, the World Bank forecast said. Without India and China the developing countries' output would shrink 1.6 per cent, the Bank said in its Global Development Finance 2009 report. Global GDP growth is expected to rebound to 2 per cent in 2010 and 3.2 per cent by 2011. In developing countries, growth is expected to be higher, at 4.4 % in 2010 and 5.7 % in 2011, albeit subdued relative to the robust performance prior to the current crisis.

Back home, price rise experienced by consumers - the Consumer Price Index (CPI) reportedly rose to 10.2% in May 2009, for which month the wholesale price inflation (WPI) remained less than half-a-percentage point. The higher consumer inflation may cause Reserve Bank of India to reverse the expansionary monetary policy and might even curb the central government's spending plans which may cause hindrance in efforts to boost the slowing economy.

Meanwhile, the south-west monsoon, which had been stalled since 7 June 2009, revived on 21 June 2009 and is likely to cover more parts of Maharashtra, Karnataka and Andhra Pradesh, the weather department said on Monday morning. The revived monsoon may cover Maharashtra and Madhya Pradesh by first week of July 2009.

A weak initial phase of the monsoon has stoked fears of fall in agricultural production and a surge in prices of essential commodities which may spur inflation. The country's monsoon rainfall during 1 June 2009 to 17 June 2009 was at 39.5 millimeter, 45% below the normal, the India Meteorological Department said on 18 June 2009. A weak monsoon in this season may cast its shadow on a likely recovery in India's economy. Rural demand has been strong in recent years due to good monsoon in the past few years.

The next major trigger for the market is the Union Budget 2009-2010. 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 the year ending March 2010 (FY 2010) and 7.8% in the year ending March 2011 (FY 2011).

Finance Minister Pranab Mukherjee would present the budget on 6 July 2009. The Railway Budget will be presented on 3 July 2009 and the Economic Survey would be presented on 2 July 2009.

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.

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.

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.

But foreign funds sold shares recently after aggressively buying during the past three months or so. As per the provisional figures on NSE, foreign funds sold shares worth Rs 300.29 crore on Monday, 22 June 2009. Foreign funds sold shares totaling Rs 1,711.90 crore in five trading sessions from 15 June 2009 to 19 June 2009. FII inflow in June 2009 totaled Rs 4,420.30 crore (till 19 June 2009). FII inflow in calendar year 2009 totaled Rs 25,739.70 crore (till 19 June 2009).

Meanwhile, the data on advance tax payments reported last week for the first quarter of the financial year indicated banks and fast moving consumer goods (FMCG) firms have done well in the first quarter, but realty companies continue to perform badly. Automobile sector have also paid higher taxes this year, show the revenue department's initial estimates. Indian companies paid around Rs 23,000 croe in advance tax for the first quarter of FY 2010, almost flat at the previous year's receipts.