Market may remain volatile; inflation data eyed

The market may remain volatile as traders roll over positions from the near-month February 2010 derivatives contracts to March 2010 series ahead of the expiry of the near-month February 2010 contracts on Thursday, 25 February 2010. Asian stock were mixed today, 18 February 2010. US stocks closed higher on Wednesday, 17 February 2010 on positive economic data. Closer home, the government will today unveil data on some wholesale price indices for the year through 6 February 2010 viz. the food price index, the primary articles index and the fuel price index.

Asian stocks were trading mixed on Thursday, 18 February 2010. The key benchmark indices in Indonesia, Singapore and South Korea fell by between 0.15% to 0.47%. But, the key benchmark indices in Japan and Hong Kong rose by between 0.03% to 0.15%.

Wall Street ended in positive zone after a choppy session on Wednesday, 17 February 2010. Positive economic data supported gains. US housing starts rose in January 2010. The Dow Jones Industrial average gained 40.43 points, or 0.39%, to 10,309.24. The Standard & Poor's 500 Index added 4.64 points, or 0.42%, to 1,099.51. The Nasdaq Composite Index rose 12.10 points, or 0.55%, to 2,226.29.

The Federal Reserve raised its 2010 US GDP forecast to 3.2% from 3%. Despite the improved forecast, officials continue to believe that economic conditions warrant exceptionally low interest rates. Officials also worry about the impact of the persistently high unemployment.

The head of the International Monetary Fund Dominique Strauss-Kahn has urged individual countries to act fast and work together on financial regulatory reform, if the problem of preventing another crisis is to be tackled efficiently.

Closer home, farm minister Sharad Pawar said on Wednesday that high food prices have started to ease and will dip further next month. But Finance Minister Pranab Mukherjee is still worried about inflation amid signs that the headline number may hit 10% by March. Despite a string of government efforts to ease concerns, rising prices are posing a big challenge for the Congress-led government, particularly high food prices, and they may prompt the central bank to raise interest rates even before April. Pawar said prices would start coming down in the next seven to 10 days. Food prices rose an annual 17.4% in January 2010, easing slightly from a rise of 19.2% in December.

But, the headline inflation accelerated to its fastest pace in 14 months in January 2010, rising an annual 8.56%, above the central bank's revised end-March inflation forecast of 8.5%. On Tuesday, India's chief statistician Pronab Sen said that headline inflation could top 10% by the end of March. A government panel has advised eliminating price controls for gasoline and diesel and an income-linked rise in kerosene and cooking gas prices. The RBI is widely expected to raise borrowing rates at its April review after surprising markets with a bigger-than-expected rise in banks' cash reserve requirements in January.

Pranab Mukherjee also said economic growth in the fiscal year 2010/11 (April-March) could top 8%, following a growth at around 7.5% in the current fiscal year ending March. The government officials have forecast the economic growth in the current year in the range of 7-8%.

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 government has priced the follow-on public offer of Rural Electrification Corporation (REC) at Rs 203 per share, 7.5% lower than the prevailing market price. An empowered group of ministers met on Wednesday to finalise the floor price of the offer that opens for subscription on Friday 19 February 2010. 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 rose on Wednesday, 17 February 2010 for the second straight day tracking firm global stocks. The BSE 30-share Sensex rose 202.23 points or 1.25% to 16,428.91 on that day.

As per provisional figures on NSE, foreign funds bought shares worth Rs 520.22 crore and domestic funds bought shares worth Rs 197.14 crore on Wednesday.