Market extends losses for the second day in a row; breadth weak

The key benchmark indices dropped in choppy trade, extending losses for the second straight day as the US Federal Reserve's decision to raise its discount rate hurt investor sentiment. The BSE 30-share Sensex fell 136.21 points or 0.83%, up close to 110 points from the day's low and off close to 120 points from the day's high. Global stocks and US index futures fell after the US Federal Reserve raised its discount rate for the first time since the financial crisis. The latest Fed move stoked expectations that a hike in the Fed's main policy rate could follow sooner than many had anticipated.

Realty, metal, auto, IT and banking stocks fell. Index heavyweight Reliance Industries, too, edged lower. The market breadth was weak.

A bout of volatility was witnessed in the second half of the trading session. The market staged a strong intraday rebound in mid-afternoon trade after a sharp slide in afternoon trade. The BSE Sensex recouped nearly all the intraday losses in late trade. However, the intraday rebound proved short-lived. The market once again lost ground towards the close of the trading session.

India VIX, a volatility index based on the S&P CNX Nifty index option prices, jumped 7.19% to 31.90. India VIX is a measure of the market's expectation of volatility over the next 30 calendar days. VIX rises when traders buy options as insurance against sharp market movements, especially a fall.

Investors put their money to work more selectively in the week ended 17 February 2010, choosing mostly developed equity markets and investment grade bonds, while avoiding Chinese stocks and high-yield bonds, EPFR Global data showed on Friday. China-focused equity funds had net redemptions for the sixth time in the last seven weeks as fears of more central bank policy tightening spooked investors, while Latin American equity funds posted outflows for the fourth consecutive week. Russia and Indian equity funds had relatively small inflows for the week ended 17 February 2010, while Brazil had a second straight week of outflows.

C. Rangarajan, the prime minister's economic adviser, today said that India's economy is likely to grow at over 7.2% in the current fiscal year ending March 2010. The prime minister's economic advisory council said on Friday that inflation was a down-side risk to its projected growth rate of at least 8.2% in 2010/11, and any policy action would have to factor in the "significant" danger of high food inflation spreading into broader prices.

Although the large deficits this year and the last year did have a counter-cyclical impact, it is necessary to initiate measures towards fiscal consolidation in the forthcoming budget, the council said in its review of the financial year 2009/10. The fiscal imbalance is a matter of concern and the process of consolidation must begin in the next financial year itself, the prime minister's economic advisory council said on Friday.

The wholesale price inflation is seen at around 8.5% by the end of March, Rangarajan said. He also said that the government's market borrowing in the next fiscal year ending March 2011 is likely to be around or slightly lower than Rs 4,51,000 crore ($97 billion) in the current fiscal year

Coming back to stocks, a foreign brokerage predicts that Indian equity and equity-linked offerings may jump by as much as 33% this year as companies and the government tap a growing pool of domestic capital as the economy recovers. Indian companies may raise $25 billion to $30 billion in share sales in 2010, up from $22 billion last year.

European shares fell on Friday, snapping a four-day winning streak, after the US Federal Reserve raised an emergency lending rate for the first time since the financial crisis, with banks the worst performers. The key benchmark indices in Frnace, Germnay and UK fell by between 0.21% to 0.47%.

Asian stocks fell after the US Federal Reserve raised its discount rate in a fresh sign the Fed thinks financial markets are gradually returning to normal. The key benchmark indices in Hong Kong, Indonesia, Japan, Singapore and South Korea were down by between 0.22% to 2.59%.

The US Federal Reserve raised the discount rate from 0.5% to 0.75% effective 19 February 2010 and said the move will encourage financial institutions to rely more on money markets, rather than the central bank, for short-term loans. The announcement was made after trading hours in the US. It was the first increase in the discount rate in more than three years, and the move widens the discount rate spread over the top range for the federal funds rate to 0.5%. The central bank also cited last month's statement, which said economic conditions are likely to warrant exceptionally low levels of the federal funds rate, or the target rate for overnight loans between banks, for an extended period.

The move marks another step by the Fed in a gradual retreat from its unprecedented actions to halt the deepest financial crisis since the Great Depression. The Fed has provided hundreds of billions of dollars in credit to banks, bond dealers, commercial paper borrowers and troubled financial institutions. St. Louis Federal Reserve President James Bullard said the market's belief in a high probability of rate hikes this year is "overblown."

Meanwhile, Singapore's government said the economy will expand faster than initially expected this year, adding to evidence of a sustained regional recovery that has prompted policy makers to end some stimulus measures. Gross domestic product will increase 4.5% to 6.5% in 2010 after shrinking 2 % last year, the trade ministry said in a statement today

US index futures cut initial losses. Trading in US index futures indicted that the Dow could fall 57 points at the opening bell on Friday, 19 February 2010. Dow futures were down nearly 100 points at one point of time during the day.

US markets ended higher for a third straight day on Thursday, 18 February 2010 as an encouraging manufacturing report helped fuel investor optimism about the recovery. The Philadelphia branch of the Fed said its gauge of regional manufacturing rose to 17.6 in February from 15.2 in January. Meanwhile initial jobless claims unexpectedly rose by 31,000 last week. The January PPI also showed sharper-than-expected rise in prices. The Dow gained 83.66 points, or 0.8%, to 10,392.90. The broader Standard & Poor's 500 index added 7.24 points, or 0.7%, to 1,106.75. The Nasdaq Composite Index rose 15.42 points, or 0.7%, to 2,241.71.

There is no one-size-fits-all solution to deal with the potentially destabilizing rapid flow of money into emerging markets economies, according to a new study published by the International Monetary Fund on Friday. In a staff paper that looks at capital controls as a way to restrict a sudden surge in money flowing into a country, the IMF said they could be a legitimate way to deal with the problem in some cases but preferably should be part of a package of policy measures.

Closer home, food inflation picked up for the fourth straight week in early February, heightening worries it was driving headline inflation past official forecasts and increasing the chance of the Reserve Bank of India (RBI) pushing up rates.

Food prices rose 17.97% in the 12 months to 6 February 2010 after an annual rise of 17.94% in the previous week, data released on Thursday showed. The fuel price index rose an annual 9.89% in the same week, down from a rise of 10.4% on year the previous week. Rising prices are a huge headache for the Congress-led government, particularly high food prices that may overshadow government efforts to cut spending and the fiscal deficit in a 26 February 2010 budget. Inflation in manufacturing picked up to 6.55% from about 5% in December, a sign that inflationary pressures were spreading to other sectors of the economy.

Climbing food and fuel costs along with a pick up in manufacturing prices are expected to push headline wholesale price inflation (WPI) from 8.56% in January to 10% by March, according to some analysts and India's chief statistician Pronab Sen. The RBI is widely expected to raise borrowing rates after it surprised markets last month with a bigger-than-expected rise in banks' cash reserve requirements and given that inflation has already topped its revised end-March forecast of 8.5 %.

On Wednesday, Farm Minister Sharad Pawar said food prices have started to ease and will dip further next month, while Finance Minister Pranab Mukherjee said higher food prices continue to be a worry.

The next major trigger for the stock market is the Union Budget 2010-2011 on 26 February 2010. Among the key issues, analysts and economists expect the Finance Minister to provide a road map for the introduction of the key direct and indirect tax reforms viz. the direct tax code (DTC) and the Goods & Services Tax (GST) in the Budget. The GST will enable the Indian corporate sector to get much-needed relief from a multiplicity of state and Central taxes. However, several critical issues need to be resolved before it can be put in place. The Finance Minister must utilize this opportunity to effect a smooth transition to this new system.

The hope of direct tax reform has risen with the release of the draft Direct Tax Code by the government in calendar 2009. The Direct Taxes Code is supposed to replace the Income Tax Act by consolidating and amending income tax provisions for all categories of people and institutions. The DTC proposes doing away with tax exemptions and bringing under the tax purview a number of entities including trusts that pay no tax at the moment. The thrust of the new code is to promote efficiency and equity by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base.

Meanwhile, the government may increase excise duties as a first step towards a gradual winding down of fiscal stimulus measures. It may also raise the service tax rate to 12% from 10%. It may be recalled that the government had slashed the Central Value Added Tax (Cenvat) rate for excise duty from 14% to 8% in two rounds starting in December 2008. It had also cut service tax by 2 percentage points. These reductions were effected in order to provide a stimulus to domestic industry. Since the overall prospects for growth are much brighter today, the finance minister may withdraw a part of the stimulus in order to boost tax revenue.

The Finance Minster may project a lower fiscal deficit for 2010-11 based on higher revenue projections due to economic rebound. It remains to be seen if there are structural reforms to reduce the subsidy burden such as decontrol of petrol and diesel prices as recommended by the Kirit Parikh committee recently.

It also remains to be seen if there is any progress on financial sector reforms. The pending financial sector reforms include raising the foreign direct investment (FDI) cap in private sector insurance companies from 26% to 49% - a Bill for which is pending in Parliament.

As far as government expenditure is concerned, the thrust areas could be agriculture, water resources, power, roads & other infrastructure projects and social sector schemes.

Meanwhile, the follow-on public offer of Rural Electrification Corporation (REC) received lackluster response from investors. The FPO was subscribed 0.2 times by 16:00 IST on the first day of bidding for the issue today, 19 February 2010, NSE data showed. The government has set the floor price of the follow-on public offer of Rural Electrification Corporation (REC) at Rs 203 per share. The issue, which will be open between 19-23 February 2010, will see the sale of 12.87 crore equity shares and an offer for sale of 4.29 crore government owned shares. Like in the case of NTPC, the issue will take the French auction route, but will give flexibility to bidders to scale down their bid quote. REC will reserve 50% the shares on offer for institutional bidders, while retail investors will get 35%.

The BSE 30-share Sensex fell 136.21 points or 0.83% to 16,191.63. The barometer index fell 25.90 points at the day's high of 16,301.94 in late trade. The Sensex declined 253.23 points at the day's low of 16,074.58 in afternoon trade.

The S&P CNX Nifty fell 42.85 points or 0.88% to 4844.90. Nifty February 2010 futures were at 4,848, at a premium of 3.10 points as compared to the spot closing of 4,844.90. Turnover in NSE's futures & options (F&O) segment surged to Rs 92,723.13 crore from Rs 64,858.39 crore on Thursday, 18 February 2010.

The market breadth, indicating the overall health of the market was weak. On BSE, 786 shares advanced as compared with 2010 that declined. A total of 70 shares remained unchanged.

Among the 30-member Sensex pack, 26 shares declined while only 2 of them managed gains.

The BSE Mid-Cap index fell 1.41% and the BSE Small-Cap index fell 1.57%. Both the indices underperformed the Sensex.

The BSE Healthcare index (up 0.07%), BSE FMCG index (down 0.17%), BSE IT index (down 0.35%), BSE Capital Goods index (down 0.57%), BSE Oil & Gas index (down 0.73%), BSE Bankex (down 0.79%), BSE PSU index (down 0.82%), outperformed the Sensex.

The BSE Realty index (down 3.37%), BSE Metal index (down 2.49%), BSE Consumer Durables index (down 1.44%), BSE Power index (down 1.16%), BSE Auto index (down 0.99%), underperformed the Sensex.

BSE clocked turnover of Rs 3833 crore, lower than Rs 3998.03 crore on Thursday, 18 February 2010.

Index heavyweight Reliance Industries (RIL) fell 1.32%, extending Thursday's near 4% slide. The government has reportedly demanded another $2.7 million from RIL towards royalty and profit petroleum payments on gas produced from the Krishna-Godavari (KG) D6 for the six-month period from April-September 2009, arguing that the company did not take into account the marketing margin it levies while calculating the dues.

Meanwhile, RIL may reportedly raise its offer for LyondellBasell that will include cash and stock options for shareholders and creditors. It had offered a deal that would value the bankrupt petrochemicals maker at about $13.5 billion, but earlier this week the target firm settled a dispute with creditors, paving the way for an exit from bankruptcy.

Rate sensitive auto fell as government is widely expected to raise excise duties on automobiles in Union Budget 2010-2011 next week. India's biggest tractor maker by sales Mahindra & Mahindra (M&M) fell 1.32% falling for the second straight day.

India's largest commercial vehicle maker by sales Tata Motors fell 1.68% falling for the second straight day. Tata Motors on Tuesday said it will hike commercial vehicle prices by up to 2% on account of new emission norms. The company also announced plans of bidding for a Rs 350-crore defense contract to supply light bullet-proof vehicles.

The company said on Monday its global vehicle sales for January nearly doubled to 85,714 units from a year earlier. The sales include UK-based luxury brands Jaguar and Land Rover, whose sales nearly trebled in the month to 16,269 units from a year ago, the company said in a statement. It had earlier said domestic sales, including trucks, buses and cars, jumped an annual 77 % in January.

But, India's largest car maker by sales Maruti Suzuki India reversed early losses and rose 0.63% after a senior official of the company told the media that the firm will add 3,000 employees in the next three years. Maruti Suzuki's head of human resources, S.Y.Siddiqui was quoted by the media as saying that the company is also investing Rs 200 crore to add showrooms and stockyards.

A hike in excise duty will raise the cost of owning new vehicles. Coupled with the recent price hikes across segments, and the price increases likely in April 2010 on account of the change in emission norms, these potential price increases on excise duty increase may dampen demand.

On the flip side, bus makers Ashok Leyland and Tata Motors may benefit in case of further allocation of government expenditure towards the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) in the Union Budget 2010-11. Bus demand has been boosted this year by an order for 15,000 buses under JNNURM

Metal stocks declined after London Metal Exchange copper fell more than 1% on Friday, under pressure from a firmer dollar and a surprise hike in the US Federal Reserve discount rate.

Hindalco Industries, Steel Authority of India, Sterlite Industries , Hindustan Zinc , JSW Steel fell by between 1.55% to 3.36%.

Tata Steel, the world's number 8 steelmaker by capacity fell 2.56%, declining for the second straight day. With just a day away from the scheduled mothballing of the Teesside Cast Products plant (owned by Tata Steel-controlled Corus) in north-east England, the area mayor, Ray Mallon, has reportedly confirmed that a consortium may be interested in rescuing the plant. In a note to the media, the mayor said he did not want to raise false hopes but he regarded the consortium as credible and called for them to be given every assistance by Tata and the government.

Tata Steel on Tuesday posted its first consolidated quarterly profit in four quarters and said reviving global demand would further boost earnings in the three months to March 2010. After trading hours on Tuesday, Tata Steel said its consolidated net profit for the December 2009 quarter, which includes its UK unit Corus, fell 42%, although higher prices and increased volumes led to a rise in its operating profit margins.

Tata Steel said its consolidated net profit in the October-December period fell to Rs 473 crore from Rs 814 crore last year. Revenue fell 20% to Rs 26,069 crore. The stock rose 2.23% on Tuesday ahead of the result.

Rate sensitive realty shares fell on expectations of rate hike by the central bank to tame inflation. Indiabulls Real Estate, Sobha Developers, Omaxe, Akruti City, Orbit Corporation, Ansal Properties and Infrastructure and DLF fell by between 0.38% to 6.21%.

Unitech fell 1.41% extending losses for the straight third day. Recently Telenor bought a further 7.15% stake in its telecom joint venture Unitech Wireless by pumping in additional Rs 2022 crore of fresh equity.

Unitech and DLF would be the chief beneficiaries if the government providers thrust to affordable housing projects in the Union Budget 2010-11 next week.

Rate sensitive banking shares fell on talks the central bank will hike policy rates to tame rising inflation. India's largest private sector bank by net profit ICICI Bank fell 1.05%, declining for the second straight day. Its ADR rose 0.99% on Thursday. India's largest bank by net profit and branch network State Bank of India fell 1.79%, declining for the second straight day. India's second largest private sector bank by net profit HDFC Bank rose 0.94% to Rs 1699.55. The sock came off the day's low of Rs 1660. Its ADR rose 2.47% on Thursday.

The central bank said last week it will introduce from 1 April 2010 a new base rate to price credit more transparently, replacing the existing benchmark prime lending rate (BPLR).The Reserve Bank of India said the base rate will be the new reference rate for determining lending rates. According to draft guidelines, the RBI has proposed that the actual lending rate charged to borrowers would be the base rate plus borrower-specific charges including product-specific operating cost, credit-risk premium and tenure premium said.

India's largest engineering and construction firm by sales Larsen & Toubro fell 0.06% to Rs 1475.30. The stock came off the day's low of Rs 1445.90. Larsen & Toubro reportedly plans wind power projects in Gujarat, Maharashtra and Tamil Nadu for captive use. It is also investing about Rs 8000 crore to generate 700-800 megawatts (MW) of hydro power from projects in Himachal Pradesh, Uttarakhand and Arunachal Pradesh. The company said last week it won orders worth Rs 582 crore.

India's largest power equipment maker by sale Bharat Heavy Electricals (Bhel) fell 0.83% to Rs 2366.30. The company will reportedly sign a pact with UK-based Sheffield Forgemasters next week to upgrade manufacturing of castings and forgings.

The government may levy customs duty on import of equipment for power projects in Union Budget 2010-11, which may give a fillip to domestic manufacturers of boilers, turbines and generators. The levy of import duty on equipment for power projects will benefit companies such as Bhel and L&T.

Software majors fell as Federal Reserve's discount rate hike could crimp economic recovery. US is the biggest export market for Indian IT firms. India's third largest IT exporter by sales Wipro fell 0.28%. Its ADR rose 0.52% on Thursday. India's second largest IT exporter by sales TCS fell 0.94%. India's largest IT exporter by sales Infosys Technologies fell 0.2%. Its ADR fell 0.78% on Thursday.

Tata Consultancy Services (TCS) and Wipro are reportedly among the 37 global organisations, including IBM and HP, vying for the UK government's cloud computing project. Out of the total project, the cloud component alone is valued at Rs 2,200 crore.

The IT sector is looking for an extension of the tax holiday for the Software Technology Park of India (STPI) scheme. The government provides tax benefits under Section 10 (A) of Income Tax Act for units set up in the Software Technology Parks of India (STPIs), which is due to expire on 31 March 2011 (FY 2011). If the scheme is extended by one more year till 31 March 2012 (FY 2012), it will boost projected FY 2012 earnings of IT firms

FMCG stocks fell as excise duty on fast moving consumer goods (FMCG) is expected to go up by 200-300 basis points in the 2010-11 Budget. ITC, Hindustan Unilever, Nestle India, Marico fell by between 0.17% to 1.48%.

Higher excise duty may result in margin pressure on some companies. Companies may resort to price hikes with a lag of one or two quarters. Firms such as Dabur India, Godrej Consumer Products and Marico will be relatively less impacted as they do have production units in excise-exempt locations.

India's largest power utility firm by sales NTPC fell 1.61%. The company's follow on public offer managed to scrape through early this month with the issue getting subscribed 1.2 times. The issue, through which the government is divesting 5% of its stake, at a floor price of Rs 201 a share, opened on 3 February 2010 and closed on 5 February 2010. At the floor price, the follow-on-public offer (FPO) is valued at Rs 8,286 crore.

Among other power stocks, Tata Power Company, Reliance Infrastructure, Reliance Power fell by between 0.85% to 2.54%.

India's largest drug maker by sales Ranbaxy Laboratories was flat after gaining for last three trading sessions. Daiichi Sankyo recently said it will launch new innovative products in Mexico through the marketing division of Ranbaxy's Mexican subsidiary Ranbaxy Mexico.

Among other healthcare stocks. Cipla, Sun Pharmaceutical Industires, Lupin, Divi's Laboratories, Pfizer fell by between 0.03% to 1.88%.

India's largest mobile services operator by sales Bharti Airtel fell 1.01% on reports company may sell shares to Singapore Telecommunications to partly fund its purchase of Zain's African assets and avoid taking on too much debt. A share sale to SingTel, which owns about 30% in the Indian mobile services firm, could help Chairman Sunil Mittal avoid an embarrassment if investors shun a rights issue, reports said. Bharti Airtel is in exclusive talks to buy most of the African assets of Kuwaiti telecoms firm Zain for $9 billion. The stock was battered recently on the concerns of an overvalued deal.

Shares of Thangamayil Jewellery was settled at Rs 71.10, a 5.2% discount over the issue price of Rs 75 per share. The stock debuted at Rs 70, a 6.7% discount over the issue price.

Cals Refineries clocked the highest volume of 1.45 crore shares on BSE. Unitech (1.18 crore shares), Thangamayil Jewellery (0.86 crore shares), SpiceJet (0.75 crore shares), Chambal Fertilisers & Chemicals (0.58 crore shares) were the other volume toppers in that order.

HDFC Bank clocked the highest turnover of Rs 150.67 crore on BSE. Reliance Industries (Rs 95.66 crore), State Bank of India (Rs 91.48 crore), Tata Steel (Rs 84.35 crore) and Unitech (Rs 83.22 crore) were the other turnover toppers in that order.