Market may gain on higher Asian stocks

The key benchmark indices may gain snapping last two days of losses on higher Asian stocks. Asian stocks gained on Monday after a smaller-than-estimated increase in U.S. consumer prices eased concern the Federal Reserve will increase interest rates. The key benchmark indices in Hong Kong, Japan, Indonesia, South Korea, Singapore and Taiwan rose by between 0.51% to 3.16%. But China's Shanghai Composite fell 0.16%.

US stocks closed higher after a see-saw session on Friday, 19 February 2010 as investors worried the eventual withdrawal of easy money will hurt Wall Street. Stocks on Wall Street closed out their best week of the year after a volatile session as investors weighed the Federal Reserve decision late Thursday to raise its discount rate for banks by one-quarter percentage point to 0.75 percent. The Dow Jones industrial average closed up 9.45 points, or 0.09 percent, at 10,402.35. The Standard & Poor's 500 Index was up 2.42 points, or 0.22 percent, at 1,109.17. The Nasdaq Composite Index was up 2.16 points, or 0.10 percent, at 2,243.87.

The government report showed an index of U.S. consumer prices rose 0.2 % in January from the previous month, less than the 0.3 % projected by economists. New York Federal Reserve President William Dudley indicated on Friday that policy makers are more concerned about maintaining growth than fighting inflation, citing the consumer price data. The Fed raising the so-called discount rate from 0.5 % to 0.75 % on Thursday 18 February 2010 triggered concern stimulus programs are winding down.

Greece's borrowing needs are covered until mid-March and Athens so far is meeting goals set out in an austerity plan, Greek Prime Minister George Papandreou said.

Closer home the country needs to urgently import 3-5 million tonnes of white sugar and may ship in rice to calm food prices, a top aide of the prime minister said, signalling a tighter supply situation than previous estimates. has faced falling output of key crops like sugar and widespread protests against food prices that are up 18 % because the worst monsoon in 37 years damaged crops in 2009. The chairman of the panel, former Reserve Bank governor C. Rangarajan, said it would take up to three months for soaring food prices to ease even with the imports. Farm minister Sharad Pawar has repeatedly said the food situation was under control, helped by government measures such as easier imports and restrictions on stocks.

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, a top government panel said on Friday. The panel also projected economic growth of at least 8.2 % in 2010/11, from over 7.2 % forecast for the current fiscal year. Other top officials have said the economy would grow at 8 % in the year that ends March 2011. 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.

The government aims to cut its fiscal deficit to 5.5 % of GDP for the year that begins 1 April 2010, and Finance Minister Pranab Mukherjee is expected to announce a partial roll-back of stimulus measures when he announces the budget for the next fiscal year on 26 February 2010. The council said by keeping spending and subsidies at current levels, it was possible to cut the fiscal deficit by 1-1.5 % for the year that ends in March 2011 without hurting economic growth. Rangarajan said he expects wholesale price inflation to hit 8.5 % by the end of March, although some private forecasters expect it to reach double-digits by then. Still, the Reserve Bank of India has said it is unlikely to move interest rates before its 20 April 2010 policy review, barring an unforseen event.

Rangarajan said the economy will grow at over 7.2 % in the year that runs through March, slightly lower than the central bank's projection of 7.5 %.

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 0.29 times on the first day of bidding for the issue on Friday, 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 key benchmark indices dropped in choppy trade on Friday,19 February 2010 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% to 16,191.63 on that day.

As per provisional figures on NSE, foreign funds bought shares worth Rs 17.91 crore and domestic funds sold shares worth Rs 397.13 crore on Friday.