Small-cap, mid-cap indices slide as caution prevails ahead of the Budget

The key benchmark indices closed after moving between positive and negative zone in intraday trade as investors preferred to stay on the sidelines ahead of the Budget. Finance Ministry's Economic Survey for 2009-2010 tabled in the parliament today, 25 February 2010, predicted that India would bounce back to a high 9% growth in 2011-12 and is on its way to becoming the world's fastest growing economy in four years. Meanwhile, the latest data showed a strong growth in the infrastructure sector in the month of January 2010.

The BSE 30-share Sensex was down 1.77 points or 0.01%, up close to 90 points from the day's low and off close to 70 points from the day's high. Finance Minister Pranab Mukherjee will table Union Budget 2010-2011 in the parliament at 11:00 IST on Friday, 26 February 2010.

Auto stocks were mixed. IT, capital goods and realty stocks rose. But, index heavyweight Reliance Industries edged lower. FMCG stocks also fell. The Economic Survey said, the broad based nature of the recovery creates scope for a gradual roll back, in due course, of some of the measures undertaken over the last 15 to 18 months to put the economy back on the growth path.

The infrastructure sector output grew 9.4% in January 2010 from a year earlier, higher than an upwardly revised annual growth of 6.4% in December 2009, government data showed on Thursday. During April-January, the first 10 months of the 2009/10 fiscal year, output rose 5.4% from 3% a year ago. The infrastructure sector accounts for 26.7% of India's industrial output.

India VIX, a volatility index based on the S&P CNX Nifty index option prices, declined for the third day in a row after a recent sharp surge. The index declined 2.8% to 29.55. India VIX is a measure ofthe market's expectation of volatility over the next 30 calendar days.

The market pared gains soon after a firm start. The Sensex slipped into the red in morning trade as most Asian stocks fell. It cut losses after hitting fresh intraday lows in early afternoon trade. It moved in a narrow range in afternoon trade. The market once again pared losses in mid-afternoon trade. The intraday recovery gathered steam in late trade.

The Economic Survey tabled in the parliament today said capital inflows from advanced economies could be a challenge for India as they might lead to overheating of the economy. With interest rates at historic lows in most advanced economies, capital flows from these countries are finding their way into the fast growing Asian economies, including India.

It added that issue that arises is whether inflows are in excess of the domestic absorptive capacity or this could lead to overheating of the economy. The Survey added that this can also be looked at as the "impossible trinity" dilemma of policy choice between price stability, exchange rate stability and capital mobility.

Meanwhile, the 13th Finance Commission recommended increase in states share to 32% of Central tax proceeds from the current level of 30.5%. The Commission said the government must cut its fiscal deficit to 3% of the GDP by 2013/14 and eliminate its revenue deficit in the year after. It also said the government must also cap its total debt at 68% of the GDP by the 2014/15 financial year. These recommendations have been accepted in principle by the government, the Commission said.

The Commission has projected fiscal deficit of 5.7% for the the year to March 2011 and 4.8% for the year through March 2012. The fiscal deficit should drop to 4.2% in 2012/13 and to 3% in 2013/14, it said. The Commission said the government should list all low-yielding state firms

The Reserve Bank of India has estimated the economy has capacity to absorb federal and state borrowings equal to 5-6% of GDP in the fiscal years 2010/11 to 2014/15, the Commission's said.

The Commission also proposed that a new Fiscal Responsibility and Budgetary Management (FRBM) Act should have a space for relaxing targets of deficits on account of economic shocks. The FRBM Act needs to specify the nature of shocks that would require relaxation of the targets thereunder, the commission recommended.

The Economic Survey today called for channelising long-term contractual savings for the development of core sectors on a large scale. The pre-Budget document on health of the economy stated that telecom, power, coal, ports, civil aviation and roads have shown signs of recovery in 2009-10. However, reaching the target of an infrastructural investment of 9% of the GDP fixed by the 11th Five-Year Plan (2007-12) would be extremely challenging task, it survey said.

The economic survey for the 2009-10 financial year urged a calibrated exit from fiscal stimulus, which cushioned India's economy from the worst of the global downturn. The report, presented in parliament ahead of Friday's general budget, forecast economic growth at 8.25-8.75% in 2010/11, accelerating to over 9% the year after, compared with projected growth of 7.2-7.5% in the current year.

It also highlighted the possibility of the economy achieving a double-digit growth within the next four years, underscoring the view that the economy is on a firm footing.

Strong growth along with supply-side inflationary pressures are pushing up inflation in India. High food prices, which rose over 17% in January, could spill over into general inflation, the report said. Lasting fiscal consolidation could accrue with reforms in the design and delivery of planned schemes, outcome focus of expenditure and institutional reforms, the report said.

The government is financing its fiscal gap for the current fiscal year by a record Rs 4,51,000 crore ($97 billion) of market borrowing and analysts fear high government borrowing in the next fiscal year runs the risk of crowding out private credit demand and hurting the economic recovery.

The 13th Finance Commission said the government can raise funds equal to 0.88% of GDP per year via stake sales in next 5 years. It said stake sales in unlisted state firms could garner Rs 24,000 crore and the stake sales of listed state firms could garner Rs 3,41,000 crore. Stake-sales in state banks could fetch Rs 17000 crore, the panel said.

The economic survey said risk of double-dip recession in advance economies has direct implication for India. The survey said production of farm and allied sectors fell 0.2% in 2009-10, adding that there is a need for serious policy initiatives to achieve annual 4% agriculture growth. The survey suggested direct food subsidy via food coupons to households and favours making available food in open market. The survey also favours issuing monthly ration coupons for the poor.

Coming back to stocks, rollover in Nifty futures was about 55% from February 2010 series to March 2010 series at the end of Wednesday's trade. Rollover in Mini Nifty futures was about 39.05% and the market wide rollover was about 59%. The near-month February 2010 derivatives contracts expired today.

Railway Minister Mamta Banerjee cut freight rates for grains and kerosene by Rs 100 ($2.2) per wagon and kept passenger fares and freight rates unchanged in the Railway budget 2010-11 presented in the Parliament on 24 February 2010, adding to measures designed to help tame persistently high inflation. Among other major measures, she proposed Rs 41,426 crore, the highest ever plan investment to provide efficient, customer focused and modern railway network.

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.

The Centre on Wednesday said it was confident of reaching an amicable solution with the states on the differences over the proposed Goods and Services Tax, which is now certain to miss the April 1, 2010 deadline for its rollout.

European markets reversed early losses on Thursday. The key benchmark indices in Germany and UK rose by between 0.04% to 0.11%. But, France's CAC 40 fell 0.11%.

Asian stocks declined on Thursday on concern Greece's credit rating will be downgraded, putting the global economic recovery at risk. The key benchmark indices in Indonesia, Japan, South Korea, Hong Kong, Singapore and Taiwan fell by between 0.33% to 1.57%. But China's Shanghai Composite rose 1.27%.

Trading in US index futures indicated Dow could fall 39 points at the opening bell on Thursday, 25 February 2010.

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 Industrial Average 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 BSE 30-share Sensex was down 1.77 points or 0.01% to 16,254.20. The barometer index rose 73.36 points at the day's high of 16,329.33 in early trade. The Sensex fell 88.84 points at the day's low of 16,167.13 in mid-morning trade.

The S&P CNX Nifty was up 1.15 points or 0.02% to 4859.75.

The market breadth, indicating the overall health of the market was negative. The breadth was strong earlier in the day. On BSE, 1501 shares declined as compared with 1268 that rose. A total of 105 shares remained unchanged.

From the 30 share Sensex pack, 16 declined while the rest rose.

BSE clocked turnover of Rs 2950 crore, much lower than Rs 4578.74 crore on Wednesday, 24 February 2010.

The BSE Mid-Cap index fell 0.48% and the BSE Small-Cap index fell 0.18%. Both the indices underperformed the Sensex.

Sectoral indices on BSE were mixed. BSE Capital Goods index (up 1.27%), BSE IT index (up 0.55%), Bankex (up 0.29%), Consumer Durables index (up 0.19%), Healthcare index (up 0.16%), and BSE Realty index (up 0.11%), outperformed the Sensex. BSE Power index (down 0.02%), Auto index (down 0.05%), BSE PSU index (down 0.15%), Metal index (down 0.16%), FMCG index (down 0.83%), and Oil & Gas index (down 1.05%), underperformed the Sensex.

Index heavyweight Reliance Industries (RIL) fell 1.31%. Petroleum minister Murli Deora told Rajya Sabha on Tuesday that oil and natural gas producers, including RIL need not share the marketing margin they charge from their clients with the government.

Meanwhile, RIL may reportedly raise its offer for bankrupt petrochemicals maker LyondellBasell to about $14.5 billion. RIL had previously offered a deal that valued Lyondell at $13.5 billion. LyondellBasell recently settled a dispute with creditors that has paved the way for its exit from bankruptcy.

As regards Union Budget 2010-2011, the finance minister may give infrastructure status to the oil & gas sector to promote investments. There may be tax benefits for city gas distribution and extension in tax holiday for new refineries. He may also announce declared goods status to the natural gas. The finance minister may abolish service tax on exploration and production activities.

India's largest drug maker by sales Ranbaxy Laboratoires rose 0.51% after company reported a net profit of Rs 48.82 crore in Q4 December 2009 compared to a net loss of Rs 81.90 crore in Q4 December 2008. The company announced the result during trading hours today.

But other healthcare stocks fell. Sun Pharmaceuticals Industries, Sun Pharmaceutical Industries, Pfizer and Biocon fell by between 0.64% to 2.73%.

Rate sensitive auto shares were mixed. India's biggest tractor maker by sales Mahindra & Mahindra (M&M) rose 0.23%, reversing early losses.

India's largest commercial vehicle maker by sales Tata Motors fell 2.69%, declining for the third straight day. Tata Motors said recently 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 recently 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.

India's largest car maker by sales Maruti Suzuki India rose 2.37%, extending Wednesday's gains. The stock had lost 3.24% on Tuesday after the company said it is recalling 100,000 of its A-Star hatchbacks to fix a possible fuel leak. The recall of Maruti's popular model, which is exported to Europe, began in November 2009 and is about half complete. It will cost less than Rs 10 crore ($2.2 million), the company said. Maruti said it had not received any customer complaints.

The government is widely expected to raise excise duties on automobiles in Union Budget 2010-2011 this week. A hike in excise duty in the Budget 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

India's largest engineering and construction firm by sales Larsen & Toubro rose 2.47%, gaining for the second straight day after the company reportedly signed a joint venture agreement with Karnataka Power Corporation for setting up power plants.

India's largest power equipment maker by sale Bharat Heavy Electricals (Bhel) rose 0.93%, reversing early losses.

The government may levy customs duty on import of equipment for power projects in the 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.

Rate sensitive realty shares rose on bargain hunting. Indiabulls Real Estate, DLF, Sobha Developers rose by between 0.14% to 1.15%.

Industry watchers expect that in the coming budget finance minister may increase priority sector housing loans to Rs 30 lakh from existing Rs 20 lakh. There may be a greater thrust on public private partnership (PPP) projects in housing. There may be an increase in allotment to the Rajiv Gandhi Awas Yojana (slum rehabilitation programme). Increase in tax breaks provided to housing finance and infrastructure lending companies is also expected. There may be a re-introduction of tax holiday for housing projects under Sec 80 IB (10). The increase in income tax deduction under Sec 80 C on home loan principal re-payment from Rs 1 lakh to Rs 2- 3 lakh is also expected.

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.

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, Tata Tea, Dabur India, Nestle India and United Spirits fell by between 0.08% to 2.71%.

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.

Software majors rose on hopes of extension of tax sops in the Budget. India's largest IT exporter by sales Infosys Technologies rose 1.37%. Its ADR rose 1.71% on Wednesday.

India's second largest IT exporter by sales TCS rose 0.08%. Tata Consultancy Services is seeing strong demand from clients in sectors such as financial services, utilities and pharmaceuticals, its chief executive N. Chandrasekaran said recently. However, sluggish demand from manufacturing sector continues to be a concern, he added. But, India's third largest IT exporter by sales Wipro fell 0.13% reversing early gains. Its ADR rose 1.06% on Wednesday.

The IT sector is looking for an extension of the tax holiday for the Software Technology Park of India (STPI) scheme in Union Budget 2010-2011. 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

Telecom stocks were mixed. The government will auction three slots each of third-generation wireless spectrum in most of its telecoms zones, including in the lucrative Delhi and Mumbai regions, from 9 April 2010, the telecoms ministry said on Thursday.

India's largest cellular services provider by sales Bharti Airtel rose 0.16%. Bharti Airtel, which is in talks to buy the African assets of Kuwaiti telecoms firm Zain, sees good potential in that continent amongst all emerging markets, chairman Sunil Mittal told a conference call on Thursday.India's second largest cellular services provider by sales Reliance Communications slipped 1.59% extending losses for the second straight day.

The government will invite applications from prospective bidders from 25 February 2010 and the last day for submitting bids is 19 March 2010.

Consumer durable stocks rose on hopes of strong consumption demand. Blue Star, Videocon Industries, Rajesh Exports and Asian Star Company rose by between 0.11% to 2.02%.

India's largest power utility firm by sales NTPC fell 2.03%. 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, Reliance Power, CESC, Reliance Infrastructure fell by between 0.25% to 0.87%.

The Budget expectations for the power sector include extension of income tax exemption for mega power generation projects. Among other expectations are an increase in the allocation towards the government-led electrical infrastructure augmentation schemes viz. Rajeev Gandhi Grameen Viyuktikaran Yojana (RGGVY) and Restructured Acclerated Power Development and Reforms Programme (R-APDRP) and reduction of import duty on thermal coal.

Metal stocks fell on profit taking. Bhushan Steel, Sterlite Industries, Hindalco Industries, Sterlite Industries,, Jindal Sawfell by between 0.76% to 1.59%.

Tata Steel, the world's number 8 steelmaker by capacity was flat. Tata Steel 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. 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.

Industry watchers expect that in the coming budget there may be an increase in excise duty cut to 10% from current 8%. There might be no change in customs duty structure. There may also be a removal of the 5% import duty on stainless steel and alloy steel scraps.

Rate sensitive banking shares fell on worries the central bank may raise interest rates to tame inflation. India's largest bank by net profit and branch network State Bank of India fell 0.33%. State Bank of India (SBI) is reportedly planning to raise around Rs 10,000-20,000 crore through a rights issue and is hopeful that a proposal on these lines may be made in the Budget. SBI on Monday said banks' lending rates are expected to remain stable in the next 5-6 months because of the slow credit offtake despite RBI hiking the cash reserve ratio by 75 basis points.

India's largest private sector bank by operating income HDFC Bank fell 0.87%. The bank has increased fixed deposit (FD) rates across nine maturities by 25-150 basis points. The rate hike comes three weeks after the third-quarter monetary policy review of the Reserve Bank of India (RBI), when the central bank increased the cash Reserve ratio by 75 basis points. In a rising rate scenario, where the credit growth is expected to improve in the coming quarters, the bank has decided to align its deposit rates with the market. HDFC Bank ADR rose 1.54% on Wednesday.

But, India's largest private sector bank by net profit ICICI Bank rose 1.13%, reversing early fall. The bank has increased interest rates on some term deposits with immediate effect. Interest rates on deposits maturing in 390 days and 590 days have been hiked by 25 basis points and 50 basis points respectively. Both deposits will now earn 6.75% interest.

The central bank said recently 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.

For the banking sector, industry watchers expect relaxation in the lock-in period for fixed deposits - from five to three years - to qualify for tax benefits under Sec.80C. There might be an increase in the ceiling on foreign direct investment in the insurance sector from 26% to 49%. Expectations are also that the finance minister will allow banks to raise tax-free infrastructure funds.

Hathway Cable & Datacom settled at Rs 207.80, at a discount of 13.41% to the IPO price of Rs 240. The stock listed at Rs 246, a premium of 2.5% over the issue price of Rs 240

Cals Refineries clocked the highest volume of 1.16 crore shares. Emmbi Polyarns (82.07 lakh shares), Shree Ashtavinayak (79.17 crore shares), Syncom Healthcare (70.11 crore shares) and Hathway Cables (62.49 lakh shares) were the other volume toppers in that order.

D B Realty clocked the highest turnover of Rs 148.13 crore on BSE. Hathway Cables (Rs 129.85 crore), Mphasis (Rs 68.60 crore), Reliance Industries (Rs 67.31 crore) and Larsen & Toubro (Rs 65.99 crore) were the other turnover toppers in that order.