Market may extend Wednesday's gains tracking positive Asia

The key benchmark indices may extend Wednesday's (1 July 2009) gains on positive Asia. The investor sentiment may be heightened on expectations of strong reforms in the forthcoming budget after a sudden hike in petrol and diesel prices ahead of the budget yesterday. The Annual economic survey is scheduled to be presented today, 2 July 2009.

India's Finance Minister Pranab Mukherjee will present the economic survey, which states the nation's economic performance during the fiscal year ended March 2009, in parliament. India's wholesale price index (WPI) in the 12 months to 20 June 2009 will be announced by the government today. Inflation based on the wholesale price index declined 1.14% in the year through 13 June 2009. The decline was however, smaller than a 1.61% fall in the year through 6 June 2009. Inflation had dipped to negative in early June 2009 for the first time since 1977-78.

Days before the Union Budget is presented, the government yesterday, 1 July 2009 announced a hike in petrol and diesel prices but left kerosene and LPG prices untouched. The price of petrol has been hiked by Rs 4 a litre while diesel price has been increased by Rs 2 per litre. Terming it an ad hoc price hike, the Union petroleum minister, Mr Murli Deora, said it would be applicable from midnight on 1 July 2009. After the increase, petrol in Delhi will cost Rs 44.62 a litre and diesel Rs 32.86 a litre. Investors expect the Congress party, emboldened by its recent unexpected strong election victory, may soon consider a proposal to end state controls on transport fuel prices, one of many important reforms expected from a government now unshackled from the constraints of its erstwhile Communist partners.

Most of the Asian stocks climbed today as commodity prices rose and on speculation measures taken to stimulate economy are helping to bolster consumer demand. The key benchmark indices in China, Hong Kong, Japan and Taiwan rose by between 0.01% to 1.35%. While, Key benchmark indices in Singapore and South Korea fell by between 0.04% to 0.56%.

US markets shut in the green but off highs yesterday, 1 June 2009 after a barrage of economic reports. The Dow gained 57.06 points, or 0.7%, to 8,504.06. The S&P 500 index rose 4.01 points, or 0.4%, to 923.33. The Nasdaq composite index was up 10.68 points, or 0.6%, to 1,845.72.

In economic news, the June 2009 ISM manufacturing index rose to 44.8 from 42.8 in May 2009, slightly higher than expected. Meanwhile, the ADP employment change report showed more than-expected job losses for June 2009 at 4,73,000 jobs.

Back home, the near-term major trigger for the stock market is the Union Budget 2009-10 on 6 July 2009. The Rail Budget will be presented by Railway minister Mamta Banerjee on Friday, 3 July 2009. As per media reports, another fare cut is unlikely because Lalu Prasad's Interim Railway Budget in February 2009 has already strained the Indian Railways' finances. Lalu Prasad had announced a 2% reduction in passenger fares. Similarly, any increase in freight rates looks unfeasible because of the current economic downturn. With the present economic conditions not providing much scope for either large-scale fare concessions or an across-the-board increase in freight rates, the highlight of the Railway Budget for 2009-10 is likely to be a big push to public-private partnership (PPP) initiatives to enhance the Indian Railways' capacity to earn higher revenues on a sustainable basis.

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).

The Union Budget 2009-2010 attains significant importance in the wake of the global financial crisis. Despite the country being relatively unharmed compared to the West, the UPA government will have many tasks on its to-do list, which includes boosting growth and demand, continuing to maintain liquidity, balancing inflation and also containing the country's worrying fiscal situation.

The Government has made its intention clear to push for reforms and pursue the disinvestment agenda, which was met with stiff opposition in the UPA's previous stint when the Left parties were members for a major part of the five-year tenure. The Congress party had in its manifesto released before polls promised to go ahead with disinvestment while retaining a majority holding in the state-run companies. Disinvestment programme was earlier put on backburner due to stiff opposition from the Left front.

Also the passage of the Bill to amend the Insurance Act, 1938 is likely to be touched upon in the budget. Apart from raising the foreign investment ceiling to 49%, from 26% at present, the Bill had proposed to do away with the stipulation on Indian promoters having to mandatorily sell a part of their holdings after 10 years of operation.

With infrastructure bottlenecks plaguing the economy, expectations are rife that the upcoming Budget will provide a big stimulus to this core sector, particularly roads and ports. A big push to Public Private Partnership (PPP) projects in infrastructure may be also on the cards.

For the power sector, the Budget may contain significant increases in spending, including for generation, rural electrification, and for minimising transmission and distribution losses. Other measures which the Budget may announce on infrastructure would be to give greater flexibility to the Infrastructure Investment and Financing Company (IIFCL), which has been set up as a refinancing facility for infrastructure projects, to deploy funds.

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.