FII activity, global stocks to dictate trend

The market may extend this week's sharp losses as foreign funds resort to profit taking. Foreign funds sold shares worth a net Rs 771.10 crore during the period from 21 October 2009 to 29 October 2009. Investors will closely monitor the global markets for further cues in the absence of a major domestic trigger as the Q2 draws to a close. The market remains closed on Monday, 2 November 2009, on account of Guru Nanak Jayanti.

Market men are worries that interest rates may rise sooner-than-expected after the Reserve Bank of India sharply raised inflation in its monetary policy review on 27 October 2009. The Sensex fell more than 5% in the week ended Friday, 30 October 2009.

The Reserve Bank of India (RBI) at its monetary policy review on 27 October 2009 also withdrew emergency liquidity support measures that were implemented in the aftermath of the global financial crisis.

The central bank warned of possible asset price bubbles and raised banks' provisioning requirements for commercial real estate loans. The central bank said the precise challenge for the Reserve Bank of India is to support the economic recovery process without compromising on price stability. Growth drivers warrant a delayed exit, while inflation concerns call for an early exit, it said. Premature exit will derail the fragile growth, but a delayed exit can potentially engender inflation expectations, the RBI said.

The RBI raised the statutory liquidity ratio (SLR) to 25% from 24% with effect from 7 November 2009. SLR is the minimum share of bank deposits to be held in approved government securities. By hiking the SLR, the RBI seems to be sending a signal that the high fiscal deficit will continue. The SLR hike will ensure easy funding of the government's borrowing programme for not just this year but the next fiscal as well.

Inflation based on the wholesale price index (WPI) rose 1.51% in the year through 17 October 2009, higher than previous week's annual rise of 1.21%, data released by the government showed on Thursday. Within the WPI, the food articles index rose 12.85%. The government revised upwards inflation for the year through 22 August 2009 to rise of 0.17% from an estimated fall of 0.21%.

The RBI left its key rates unchanged, but raised the wholesale price-based inflation projection for end-March 2010 sharply to 6.5% with an upward bias, from 5% earlier.

Reliance Communications, State Bank of India, Hindalco Industries, Hindustan Unilever, Unitech, Jindal Steel & Power among other will announce their Q2 September 2009 results on Saturday, 31 October 2009.

The results announced by the India Inc so far have been satisfactory. The aggregate results of 1311 companies announced so far has showed net profit jump of 36.9% to Rs 55944 crore on 2.7% fall in sales to Rs 516123 crore in Q2 September 2009 over Q2 September 2008.

The latest data showing that the US economy, the world's biggest economy, grew for the first time in a year may support global markets in the near term. The US economy grew at an annualised rate of 3.5% in the July-September 2009 period, beating forecasts of a 3.3% rise and ending a deep slump. In another sign that demand in the world's largest fuel consumer could rise, the number of US workers filing new claims for jobless benefits dipped by 1,000 for the week ended 24 October 2009.

On the flip side, the strong data has raised concerns that the US Federal Reserve may begin an exit from monetary easing policies. Fed funds futures show a 34% chance that the central bank will lift its target lending rate at the March 2010 meeting from a range of zero to 0.25%, compared with a 47% likelihood a month earlier.

Financial markets are keenly watching the two-day US Federal Reserve meeting on 3-4 November 2009 for any hint the central bank is moving closer to withdrawing its extensive support for the economy.

With short-term interest rates very low, global traders have turned to borrowing funds cheaply in the US and then reinvesting the proceeds in equities and commodities, looking to lock in higher returns and benefiting from further erosion in the dollar. The so-called carry trade has helped to further weaken the dollar this year.

International Monetary Fund managing director Dominique Strauss-Kahn said on Friday encouraging economic data in Europe and the United States does not mean the global economic crisis is over. He said fiscal stimulus packages must be kept in place until unemployment starts to fall, which is likely to take 10 to 12 months.