Market may fall on weak Asian stocks

The market may edge lower on weak Asian stocks. Asian stocks fell on Tuesday 23 February 2010, led by mining companies and automakers, following a rally that drove the MSCI Asia Pacific Index's valuations to a three-week high yesterday. The key benchmark indices in China, Hong Kong, Indonesia, Japan, South Korea, Singapore and Taiwan fell by between 0.39% to 1.97%.

The Wall Street ended slightly lower on Monday 22 February 2010 as investors held back ahead of congressional testimony by Federal Reserve chairman Ben Bernanke. Health insurers' shares rose after President Obama proposed a revised overhaul of US healthcare. Energy shares were under pressure. The Dow Jones industrial average 18.97 points, or 0.18 %, to close at 10,383.38. The Standard & Poor's 500 Index slipped 1.16 points, or 0.10 %, to end at 1,108.01. The Nasdaq Composite Index slipped 1.84 points, or 0.08 %, to close at 2,242.03.

In key events to watch out for today US Federal Reserve chairman, Ben Bernanke is scheduled to testify before house and senate committees later today and tomorrow about monetary policy. Last week the Fed announced a surprise increase in the rate it charges banks for emergency loans.

Closer home, the economy will accelerate in the coming years as it recovers from the global downturn and the government will act to protect the poor from the impact of food inflation, the president said on Monday.

President Pratibha Patil said the economy was likely to grow about 7.5 % in the current fiscal year ending in March, and the government would aim for annual growth rate of 8 % in the next fiscal year and 9 % in 2011/12. Asia's third-largest economy is recovering, with factory output surging, but food prices are growing at the fastest pace in 11 years The president's annual speech, which lays down the priorities of the government for the year, reflected those concerns over inflation as food prices keep rising at an annual rate of nearly 20 %, primarily because of a poor summer harvest. The prime minister's economic advisory council last week said surging food prices threatened to fan broader inflation and endanger the economic recovery.

With growing evidence of economic recovery, including a record 16.8 % jump in factory output in December, the government is under pressure to rollback the fiscal stimulus deployed to soften the impact of the global financial crisis. Analysts expect Finance Minister Pranab Mukherjee to announce the expiry of some of the emergency measures in the budget speech as he looks to cut the fiscal deficit, which is on track to balloon to a 16-year high in the current financial year.

The market is likely to remain highly volatile this week with the focus being on the Railway Budget and the Union Budget 2010-11. Derivatives expiry on Thursday, 25 February 2010 is also likely to add volatility on the bourses.

The highly eventful week begins with the Railway Budget on 24 February 2010. It will be followed by tabling of Economic Survey on 25 February 2010 and the Union Budget on 26 February 2010.

As far as railway budget is concerned, the Railway minister Mamata Banerjee is likely to present a populist budget leaving passenger fares untouched, but rationalise the freight rates of certain commodities like iron ore, coal and cement. Banerjee is unlikely to tinker with the freight rates of essential commodities including food grains.

As far the Union Budget 2010-2011 is concerned, the government may announce increase in 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.

The fate of three important fiscal bills, which had been stalled by the Left parties, will be closely watched. These are the Pension Fund Regulatory and Development Authority (PFRDA) Bill, Insurance Bill and Banking Regulation (Amendment) Bill.

Meanwhile, the recommendations of the 13th Finance Commission will be tabled in the parliament on 25 February 2010, just a day ahead of the budget. 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.

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

The government should begin to lower its fiscal deficit in the budget set to be announced this week but should not cut capital spending on infrastructure, the prime minister's economic advisory council said in a report released on Friday 19 February 2010. The panel also projected economic growth of at least 8.2% in 2010/11, from over 7.2 % forecast for the current fiscal year. The fiscal deficit, running at a 16-year high of 6.8% of GDP this year, threatens to push up long-term market interest rates and constrain the setting of monetary policy, the prime minister's economic advisory council said. The panel also warned about the spread of food price inflation to the broader economy.

Meanwhile, the follow-on public offer of Rural Electrification Corporation (REC) was subscribed 59% on the second day of the bidding for the IPO on Monday, 22 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 is open till today, 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.

The Key benchmark indices erased almost all the gains after an early rally on Monday, 22 February 2010 as investors turned cautions ahead of the Union Budget 2010-2011 later this week. The BSE 30-share Sensex rose 45.42 points or 0.28% to 16,237.05 on that day.

As per provisional figures on NSE, foreign funds sold shares worth Rs 101.58 crore and domestic funds bought shares worth Rs 116.60 crore on Monday.