Market may recover on higher Asian stocks

The market may recover after Monday's (22 March 2010)'s slide triggered by a surprise hike in short term interest rates by the Reserve Bank of India (RBI). Most Asian stocks rose on the back of overnight rebound on the Wall Street.

Volatility may remain high as traders rollover positions in derivatives segment from the March 2010 series to the April 2010 series ahead of the expiry of the expiry of the near-month March 2010 derivatives contracts on Thursday, 25 March 2010. The market remains closed on Wednesday, 24 March 2010, on account of Ram Navmi.

The Reserve Bank of India (RBI) after trading hours on Friday 19 March 2010, unexpectedly raised interest rates from record-low levels, citing intensifying inflationary pressures and a steady economic recovery. The market had widely expected the RBI to raise rates soon, but the timing of its 25 basis-point hike for its key lending and borrowing rates, before the April 2010 policy review caught markets by surprise.

The RBI raised the repo rate, the rate at which it lends to banks to 5% from 4.75% and reverse repo rate, the rate which it absorbs funds from the system to 3.50% from 3.25% with immediate effect. India is the second major economy after Australia to start raising interest rates with signs of global recovery emerging and local price pressures picking up. China has raised its banks' reserve requirements but has left its rates unchanged.

The wholesale price index in Asia's third-largest economy accelerated to 9.89% in February, the highest since October 2008 and well above the central bank's end-March 2010 projection of 8.5% and the 8.56% reading for January 2010.

In the emergent scenario, low policy rates can complicate the inflation outlook and impair inflationary expectations, particularly given the recent escalation in the prices of non-food manufactured goods, the RBI said in a statement. While the recovery in growth has proceeded broadly along expected lines, the inflationary pressures have intensified beyond the central bank's baseline projection, the RBI said.

Encouraging Q4 March 2010 advance tax figures of top Indian firms, indicating good Q4 March 2010 results, had boosted the bourses last week. The market also witnessed a strong post-Budget rally driven by sustained buying by foreign funds since the presentation of the Union Budget 2010-2011 on 26 February 2010. The stock market gave a thumbs up to the Union Budget 2010-2011 due to its thrust on infrastructure development, government's pledge to reduce fiscal deficit over the next three years, a smaller-than-expected 2% hike in excise duties, and reduction in taxes for individuals which will boost disposable income. The Finance Minister has assumed a modest GDP growth of about 8% and inflation of about 4.5% for 2010-2011.

Going ahead, the key triggers for the stock market are structural reforms such as decontrol of petrol and diesel prices, targeting of food subsidies, and financial sector reforms such as increase in foreign direct investment in insurance sector.

Asian share markets were mostly higher Tuesday after gains on Wall Street Monday, with banks and materials stocks supporting the Australian market. Sentiment was also lifted by the passage of the US healthcare legislation in the House of Representatives late Sunday. The key benchmark indices in Hong Kong, Indonesia, South Korea, Singapore and Taiwan rose by between 0.3% to 1.4%. But the key benchmark indices in China and Japan fell by between 0.25% to 0.3%.

After a weak opening US stocks finally closed higher on Monday led by healthcare stocks as the passage of the health-care bill lifted uncertainty surrounding the legislation that was hanging over the market. The Dow Jones Industrial Average rose 43.91 points or 0.41% to 10784.89. The Nasdaq rose 20.99 points or 0.88% to 2395.40 and S&P 500 gained 5.91 points or 0.51% to 1,165.81.

Meanwhile, European leaders tried to allay concerns that they were unprepared to aid Greece easing pressure on higher-yielding assets. The ECB president said the central bank is prepared to reassess its collateral rules if necessary, softening its stance as Greece struggles to cut the region's largest budget shortfall.

Close home, the key benchmarks ended lower on Monday, 22 March 2010, snapping gains in the previous four trading sessions following an unexpected rate hike by the central bank. Weak global markets due to worries over Greece's debt crisis also weighed on investor sentiment. The BSE 30-share Sensex was down 167.66 points or 0.95% to 17,410.57

As per provisional figures on NSE, foreign funds bought shares worth Rs 302.78 crore and domestic funds sold shares worth Rs 33.14 crore on Monday.