Market may extend Tuesday's fall on weak Asian stocks

The market may extend Tuesday's (12 January 2010) fall on weak Asian stocks after China's move to cool lending. US stocks fell on Tuesday.

Closer home, the industrial output grew at its fastest pace in two years in November, strengthening the case for the Reserve Bank of India (RBI) to tighten policy later this month to temper inflation expectations. The RBI, which reviews its quarterly policy on 29 January 2010, is expected raise banks' cash reserve ratio, the level of deposits that banks must keep in cash. India's industrial output grew at faster-than-expected 11.7 % in November from a year earlier, data showed on Tuesday. The December inflation data, due on 14 January 2010, will be the last important data for the RBI to gauge price pressures

"Inflationary pressures seem to be plateauing on the food front," Subir Gokarn, one of RBI's deputy governors, said at a banking conference."Inflationary pressures are relatively concentrated on food and very clearly as (the) economy starts to grow start to utilise whatever slack capacity there is, the risk of food inflation spilling over to wider surge increases," he added.

The finance secretary Ashok Chawla was quoted as saying on Monday the ministry backs administrative steps to tame inflation and wants hike in policy rates only if food inflation escalates into general inflation. Montek Singh Ahluwalia, the deputy chairman of Planning Commission, said the industrial growth for the full 2009/10 would be well above last year's level, but inflation could moderate in the coming months.While government officials said the industrial output growth highlighted recovery was on course, RBI's Gokarn said the recovery is somewhat uneven.

Meanwhile, the government will give financial incentives to exports of around 2,000 products including those in engineering, electronics and chemicals, Trade Minister Anand Sharma said on Tuesday. The boost, to support a nascent recovery in India's exports sector, would cost upto an additional Rs 500 crore ($110 million) in the current fiscal year ending March.

In global news, Asian stocks fell for the first time in four days on Wednesday led by mining companies, after China moved to cool lending and commodity prices dropped. China's Shanghai Composite fell 2.28%. China will raise the proportion of deposits banks must set aside as reserves by 50 basis points starting 18 January 2010, the central bank said on its Web site last night. The key benchmark indices in Hogn Kong, Japan, Indonesia, South Korea, Singapore and Taiwan fell by between 0.58% to 2.04%.

U.S. stocks fell in a broad selloff on Tuesday as investors pummeled financials on concerns about a potential government levy on banks, while Alcoa Inc's weaker-than-expected results tempered optimism. Dow Jones industrial average fell 37.86 points, or 0.36 % to end at 10,626.13. The Standard & Poor's 500 Index was down 10.82 points, or 0.94 % at 1,136.16. The Nasdaq Composite Index was down 30.10 points, or 1.30 % at 2,282.31.

The U.S. Federal Reserve will have to raise interest rates as the economy improves or risk losing the public's confidence in its commitment to keeping inflation low and stable, Charles Plosser, president of the Philadelphia Federal Reserve Banksaid on Tuesday.

Charles Plosser, said expectations for future inflation are currently "well-anchored," but warned that there is "considerable uncertainty" clouding the outlook for price pressures over the next two to five years

Closer home, the market declined on Tuesday, shrugging off better-than-expected industrial production data for November 2009. Investors chucked shares due to fears that a robust industrial production data and a recent surge in inflation will provoke India's central bank to tighten monetary policy. The BSE 30-share Sensex fell 104.20 points or 0.59% at 17,422.51 on that day.

As per provisional figures on NSE, foreign funds sold shares worth Rs 362.76 crore and domestic funds bought shares worth Rs 454.86 crore on that day.