Market seen taking a pause after four-day gains

Profit booking is likely to pull the market lower after fourth straight sessions of gains. Global cues were mildly positive. The S&P CNX Nifty futures for March 2010 expiry were trading unchanged in Singapore. The government will unveil data on some wholesale price indices for the year through 20 February 2010 viz. the food price index, the primary articles index and the fuel price index at 12:00 IST today.

As per reports, finance minister Pranab Mukherjee is unlikely to roll back the recent hike in fuel prices. Prime Minister Manmohan Singh had earlier ruled out rolling back a price hike in fuel prices despite pressure from his main allies, saying populist policies would hurt the economy in the long-term. Petrol prices rose about 6% and diesel prices by 7.75% after the government increased factory-gate taxes and import duties on the fuels as part of last week's 2010-11 union budget 2010-11, which stressed fiscal prudence to cut a wide deficit.

Reliance Industries may see action on reports the company has no plans to increase its bid for bankrupt chemicals maker LyondellBasell Industries after creditors rejected a $14.5 billion offer.

Most Asian stocks rose led by mining companies and banks, after oil and metal prices gained. However, Japanese automakers fell as the yen strengthened. The key benchmark indices in Hong Kong, South Korea, Singapore and Taiwan rose by between 0.04% to 0.26%. But, China's Shanghai Composite fell 0.14% and Japan's Nikkei 225 index slipped 0.03%.

Wall Street ended little changed on Wednesday, 3 March 2010 as worries about bank regulation and a setback for drug company Pfizer offset signs of improvement in the labor market and services sector. The Dow Jones Industrial Average was down 9.22 points, or 0.09%, to 10,396.76 and the Nasdaq Composite Index fell 0.11 point at 2,280.68. However, the Standard & Poor's 500 Index was up 0.48%, or 0.04%, at 1,118.79.

Back home, key benchmark indices extended gains for a fourth consecutive day on Wednesday, 3 March 2010 after the Finance Minister on 26 February 2010 pledged to cut fiscal deficit in the Union Budget. The BSE Sensex rose 227.45 points or 1.36% to at 17,000.01 and the NSE Nifty rose 71.1 points or 1.42% to 5088.10.

As per provisional figures on NSE, foreign funds bought shares worth Rs 959.17 crore and domestic funds sold shares worth Rs 186.71 crore on Wednesday, 3 March 2010.

Finance minister Pranab Mukherjee's bold budgetary proposals offered a progressive cut in fiscal deficit over the next three fiscal years, changed personal tax rates lifting disposable incomes in the hand of individuals and reduced surcharge on corporate tax for domestic companies to 7.5% from 10%.

The Finance Minister in his budget speech on Friday, 26 February 2010 said the government aims to introduce the Goods and Services Tax (GST) and implement the direct tax code from 1 April 2011. The peak rate of excise duties has been raised to 10% from 8% as a first step towards the winding down of fiscal stimulus measures. However, the service tax was retained at 10%. The government has estimated Rs 40000 crore from disinvestment for FY 2010-11. It has estimated Rs 35000 crore from sale of third generation telecom auctions.

The finance minister has raised personal income tax slabs which will result in increase in disposable incomes which in turn may boost consumption. The minimum alternate tax (MAT) has been raised to 18% from 15% of book profits. The fiscal deficit is pegged at 5.5% of GDP for 2010-2011, lower than an estimated 6.8% for the current fiscal year. The planned expenditure will rise 15% in 2010-2011. The increase in non-plan expenditure is only 6% for 2010-2011. The finance minister said the government also aimed to reduce the deficit further to 4.8% of GDP in the year starting 1 April 2011, and to 4.1% in the year from 1 April 2012. He said there is a need to review stimulus and move towards fiscal consolidation and review public spending.

A thrust on the infrastructure sector augurs well from a long-term growth perspective. The Finance Minister has provided Rs 1.73 lakh crore for infrastructure development in 2010-2011, which accounts for over 46% of the total plan expenditure for the year.

The stock market has applauded 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 of about 8% and inflation of about 4.5% for 2010-2011.

Though the Finance Minister said that the government will implement the Direct Tax Code from 1 April 2011, there is no clarity on actual changes in direct taxes from 1 April 2011. Further, there is also uncertainty with regards to rates under the new GST. One really does not know what the Central GST rate will be in April 2011. States also will charge State GST on the same base as that of Central GST. So the States will have a big say in fixing the rate. It has also to be a revenue neutral rate (RNR) which therefore will involve a lot of arithmetical exercise involving all the taxes which will be subsumed in the GST. It is most uncertain what it will be.

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.

Meanwhile, the latest hike in petrol and diesel prices will further increase headline inflation. Higher inflation will put further pressure on interest rates which in turn may impact corporate and consumer confidence. However, Prime Minister Manmohan Singh on Monday tried to allay fears of fuel price hike stoking inflation. He said the direct effect on the Wholesale Price Index (WPI) will be no more than 0.4%.

Food prices will be keenly watched in coming weeks for the second and third round impacts of the fuel price rise. Market men see a 25 basis points hike in the repo and reverse repo rates each by the RBI at the April 2010 policy review.

The economy is likely to do better in the quarter to March than the three preceding quarters, Finance Secretary Ashok Chawla said on Friday 26 February 2010. The economy grew a slower than expected 6% annually in the December quarter, data showed on Friday.

The manufacturing industry in February 2010 grew at its fastest pace in 20 months, expanding for the third month thanks to expanding output and new orders, a survey showed. The HSBC Markit Purchasing Managers' Index , based on a survey of 500 companies, rose to 58.5 in February, its strongest reading since June 2008, from 57.7 in January. A reading above 50 means activity is expanding.

Exports rose an annual 11.5% in January 2010 to $14.3 billion, the third consecutive rise after 13 straight months of decline, the government said on Tuesday. Imports rose 35.5% from a year earlier to $24.7 billion. The trade deficit stood at $10.4 billion in January compared with $5.4 billion a year earlier. Exports for April-January, the first 10 months of the 2009/10 fiscal year, were down 17.8% at $131.9 billion from the same period in the previous year.