Market loses ground as RBI hikes key rates

Stocks lost ground during the last week of July 2010 as the central bank increased interest rates to control inflation. Sustained buying by foreign funds, revival of monsoon rains and latest data showing easing of food inflation, however, prevented a sharp decline.

Foreign funds continue to mop up Indian stocks. Foreign funds have bought shares worth a net Rs 8109.64 crore this month (till 29 July 2010), absorbing selling by domestic institutional investors. Domestic funds have sold shares worth a net Rs 6193.15 crore this month (till 29 July 2010), as per data from the stock exchanges.



Foreign funds had pumped in Rs 7713.97 crore in equities in June 2010, absorbing selling by domestic funds in that month. Domestic funds had dumped shares worth a net Rs 4777.05 crore in June 2010.

On the corporate front, the combined net profit of a total of 1,066 companies fell 12.8% to Rs 46930 crore on 23.1% rise in sales to Rs 607640 crore in Q1 June 2010 over Q1 June 2009.

The revival of monsoon rains in the crucial sowing month of July 2010 augurs well for the Indian economy which is driven by strong domestic demand. The annual monsoon rains were 38% above normal in the week to 28 July 2010, bouncing back from a 17-percent deficit in the previous week, the weather office said on Thursday, 29 July 2010. Weekly rainfall was the highest in the current June-September season and much heavier than any week in the 2009 monsoon period, which delivered the lowest rainfall since 1972 and triggered a sustained rise in food prices.

Heavy, well-distributed showers in the past week helped total rainfall rise to normal during July, the most important month for planting rice, corn, soybean and cane. The Southwest monsoon was active over Andaman & Nicobar Islands, Vidarbha, Andhra Pradesh, Karnataka and Kerala during past 24 hours, the India Meteorological Department (IMD) said in its daily update on Thursday, 29 July 2010. The weather office expects fairly widespread rainfall over west coast, northwest, east and northeast India in the near term.

The south west monsoon is important for India as about 60% of the country's farmlands are rain-fed and more than half of the workforce is employed in the agriculture sector. The weather office expects this year's monsoon rains to be at 102% of the long-period average. Good monsoon rains would help raise farm output, boost rural incomes and lower food inflation.

Water level in main reservoirs was at 27% of capacity in the week to 29 July 2010, up from 19% in the previous week. Reservoirs are important for hydropower, which accounts for a quarter of the nation's generation capacity. They also provide water to irrigate winter crops such as wheat and rapeseed.

The food inflation declined in the week ended 17 July 2010 falling to single digit levels for the first time in many months while inflation in the fuel group remained elevated. Inflation in the Primary Articles group also fell, the Government said on Thursday. According to the data released on Thursday by the Commerce & Industry Ministry, inflation in the Food Articles group stood at 9.67% in the week ended 17 July 2010 versus 12.47% in the previous week. Inflation in the Primary Articles group was at 14.5% as against 16.48% in the week ended 10 July 2010 while inflation in the Fuel & Power group rose to 14.29% from 14.27% in the preceding week.

The infrastructure sector output grew 3.4% in June from a year earlier, slower than the annual growth of 5% in May, government data showed on Wednesday. The infrastructure sector accounts for 26.7% of India's industrial output. The industrial output rose 11.5% in May from a year earlier, at its slowest pace in seven months.

The Reserve Bank of India (RBI) at its Q1 monetary policy on Tuesday, 27 July 2010, raised its key short term interest rates for the fourth time this year to curb surging inflation. The central bank also raised its economic growth and inflation forecasts.

The RBI raised GDP forecast to 8.5% for the year ending March 2011 (FY 2011), from 8% with an upside bias earlier. The central bank said the upward revision in growth forecast is primarily based on better industrial production and its favourable impact on the services sector and also giving due consideration to the global scenario.

The RBI also signaled its strong preference for tight liquidity, saying it would ensure that excess liquidity in the system doesn't dilute the effectiveness of policy-rate actions.

The RBI also raised the baseline projection for inflation based on wholesale price index for March 2011 to 6% from 5.5% indicated in the April 2010 policy statement, taking into account the emerging domestic and external scenario. The RBI said its outlook on inflation will partly be shaped by the distribution of monsoon rains and their impact, as the agricultural harvest will be crucial to easing currently high food prices in the country.

The BSE Sensex fell 262.69 points or 1.45% to 17,868.29 in the week ended 30 July 2010. The 50-unit S&P CNX Nifty shed 81.50 points or 1.5% to settle at 5,367.60.

The BSE Mid-Cap index fell 0.34% and the BSE Small-Cap index fell 0.96%. Both these indices outperformed the Sensex.

Trading for the week began on a weak note. The key benchmark indices edged lower on Monday, 26 July 2010, as European stocks moved off highs and as US index futures fell. The BSE 30-share Sensex fell 110.93 points or 0.61% to 18,020.05. The S&P CNX Nifty fell 30.50 points or 0.56% to 5,418.60.

The key benchmark indices ended a tad higher on Tuesday, 27 July 2010, as firm European stocks and higher US index futures, helped the domestic bourses shrug off a rate hike from the Reserve Bank of India (RBI) at a quarterly monetary policy review. The BSE 30-share Sensex was up 57.56 points or 0.32% to 18,077.61. The S&P CNX Nifty was up 12 points or 0.22% to 5,430.60.

The key benchmark indices edged lower in volatile trade on Wednesday, 28 July 2010, as European stocks and US index futures declined. The BSE 30-share Sensex shed 120.24 points or 0.67% to 17957.37. The S&P CNX Nifty was down 33.05 points or 0.61% to 5,397.55.

The key benchmark indices eked out small gains on Thursday, 29 July 2010, as global stocks rose. Sustained buying by foreign funds, revival of monsoon rains this month and latest data showing easing of food inflation, supported stocks. The BSE 30-share Sensex rose 34.63 points or 0.19% to 17,992. The S&P CNX Nifty rose 11.35 points or 0.21% to 5,408.90.

The key benchmarks declined on Friday, 30 July 2010 on emergence of selling by funds, triggered by a decline in the quarterly earnings of ONGC and Hero Honda Motors amid a weakening global trend. The BSE 30-share Sensex fell 123.71 points or 0.69% to 17,868.29. The S&P CNX Nifty fell 41.30 points or 0.76% to 5,367.60.

Among 30 Sensex shares, 18 fell and rest rose during the week.

India's largest car maker by sales Maruti Suzuki India was biggest loser from the Sensex pack last week. It lost 11.79% to Rs 1198.15 after net profit declined 20.2% to Rs 465.40 crore on 27% rise in net sales to Rs 8050.70 crore in Q1 June 2010 over Q1 June 2009. The result was announced on Saturday, 24 July 2010.

Maruti said the fall in net profit was due to higher commodity prices, increase in royalty and lower 'other income'. The company said income from exports to Europe declined due to weakening of the euro.

Royalty charges increased substantially due to the increase in sales of K-series engine models and amendments in the various royalty agreements the company entered with parent Suzuki Motor Corporation, resulting in additional royalty expense of Rs 188.70 crore, including Rs 65.15 crore for the period 16 December 2009 to 31 March 2010.

Infrastructure developer Jaiprakash Associates was the second biggest loser from the Sensex pack. The stock fell 8.05% to Rs 118.25 after the company's Q1 June 2010 earnings failed to meet market expectations. Net profit of Jaiprakash Associates rose 5.05% to Rs 515.98 crore on 52.16% rise in net sales to Rs 3174.19 crore in Q1 June 2010 over Q1 June 2009. The company announced the results after trading hours on Friday, 23 July 2010.

The smaller than expected rise in net profit was due to lower operating margin and almost fourfold jump in tax outgo from last year. Operating profit margin fell to 21.6% during the quarter from 28.35% last year. The profit margins in both cement and construction businesses declined. Margins of the cement division declined due to competitive pressures arising from oversupply. The margins of the construction segment declined due to stoppage of work at Baglihar II and Srisailam canal projects.

India's largest motorcycle maker by sales Hero Honda Motors was the third biggest loser from the Sensex pack . It fell 7.28% to Rs 1815.40 as net profit declined 1.6% to Rs 491.69 crore on 12% growth in turnover to Rs 4296.61 crore in Q1 June 2010 over Q1 June 2009. The company announced the result after trading hours on Thursday, 29 July 2010.

Hero Honda said a sharp rise in commodity prices in the first half of the quarter and additional expenditure incurred on account of conversion to new emission norms negatively impacted profit margins in Q1 June 2010. Managing director and chief executive officer, Pawan Munjal said the company is striving to meet continuously rising demand for its products. He added that the company is scaling up production at its existing plants to meet expected market demand.

Larsen & Toubro (down 7.24%), DLF (down 6.53%), Reliance Communications (down 5.33%), Hindustan Unilever (down 3.98%), Jindal Steel & Power (down 2.49%), Reliance Infrastructure (down 2.47%) and Bharti Airtel (down 2.17%), were the other major Sensex losers.

Index heavyweight Reliance Industries (RIL) fell 4.77% on worries about stagnant gas production. Gas production is likely to stagnate at 60 million standard cubic metres of gas a day for a while. Reliance Industries will be able to pump natural gas at full capacity from its deep-sea field during the year to March 2013, Oil Secretary S. Sundareshan said on Wednesday.

RIL's net profit jumped 32.3% to Rs 4851 crore on 86.7% increase in net turnover to Rs 58,228 crore in Q1 June 2010 over Q1 June 2009. The results were announced after trading hours on Tuesday 27 July 2010.

India's largest tractor maker by sales Mahindra & Mahindra topped the Sensex gainers last week. It rose 5.50% to Rs 661.5 after net profit surged 40.3% to Rs 562.39 crore on 21.15% increase in net sales to Rs 5124.17 crore in Q1 June 2010 over Q1 June 2009. The company declared its results during trading hours on Wednesday, 28 July 2010.

The high and rising inflation, the likely hardening of the interest rates and the increasing volatility in global financial markets remain sources of concern, M&M said. With a strong focus on cost controls, product innovation and customer delight, the company is confident of meeting these challenges adequately, M&M said in a statement.

India's second largest private sector bank by market capitalisation HDFC Bank was the second biggest Sensex gainer. It rose 4.34% to Rs 2,127.45. HDFC Bank has raised deposit rates for various maturities by 0.25% to 0.75%, with effect from 30 July 2010. For deposits with maturity between 91 days and 6 months, the rate would be raised by 75 basis points to 5.25% from the existing 4.5%. For fixed deposit between 9 months and one year, the new rates would be higher by 50 basis points at 6.25% while for 1 year 16 days category it will be 7%, 25 basis points more than the existing rate of 6.75%.

India's largest cigarette maker by sales ITC was the third biggest gainer in the Sensex. The stock rose 2.68% to Rs 308.75. Its net profit jumped 21.81% to Rs 1070.31 crore on 16.1% increase in net sales to Rs 4816.63 crore in Q1 June 2010 over Q1 June 2009. The result was announced during trading hours on 22 July 2010.

Hindalco Industries (up 1.46%), ACC (up 1.45%), Tata Motors (up 1.04%), Sterlite Industries (up 0.63%) and State Bank of India (up 0.36%), were the other Sensex gainers.