Market may remain volatile ahead of F&O expiry; inflation data eyed

The market may remain volatile ahead of the expiry of near-term February 2010 derivatives contracts today, 25 February 2010. The Economic Survey will be tabled in the parliament today. The recommendations of the 13th Finance Commission will also be tabled in the parliament today, just a day ahead of the Union Budget 2010-2011 on Friday, 26 February 2010. The government will unveil data on some wholesale price indices for the year through 13 February 2010 viz. the food price index, the primary articles index and the fuel price index at 12:00 IST today.

Finance Minister Pranab Mukherjee said on Tuesday the government will continue measures to tame inflation in the financial year ending March 2011. The Reserve Bank of India (RBI) governor D Subbarao said on Wednesday that inflation continued to be a dominant concern. Last week, he had said the central bank would stand by its end-March inflation forecast of 8.5% and said that RBI expects current inflation to moderate by July.

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. The government's revenue will also get a boosts from sale of 3G auction and divestment. 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.

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.

Asian stocks were trading mixed on Thursday. The key benchmark indices in China and Hong Kong rose by between 0.77% to 1.06%. But, the key benchmark indices in Indonesia, Japan, South Korea, Singapore and Taiwan fell by between 0.07% to 0.73%.

US stocks closed higher on Wednesday after Federal Reserve Chairman Ben Bernanke reassured lawmakers interest rates will remain low, promising more cheap money to investors. Stocks had slipped in initial trade on disappointing new home sales data for January. The 11.2% drop in home sales was their worst monthly downturn since January 2009.

The Dow Jones rose 91.75 points or 0.89% to 10,374.16. The Nasdaq Composite index rose 22.46 points or 1.01% to 2235.9o and the S&P 500 gained 10.64 points or 0.97% to 1105.24.

In a prepared statement for his semi-annual testimony on monetary policy, Fed chairman Bernanke indicated that the FOMC continues to anticipate a moderate pace of economic recovery and that inflation is expected to remain subdued.

Closer home, the key benchmark indices ended a choppy trading session lower after Rail Minister Mamata Banerjee announced a populist rail budget for 2010-2011 during trading hours. Weak global equities also weighed on investor sentiment. The BSE 30-share Sensex fell 30.35 points or 0.19% to 16,255.97 on that day.

As per provisional figures on NSE, foreign funds bought shares worth Rs 485.54 crore and domestic funds sold shares worth Rs 154.67 crore on Wednesday.