Market may extend three-day slide

Indian stocks may extend last three days' losses, amid mixed Asian equities. Trading of S&P CNX Nifty futures on the Singapore stock exchange indicated that the Nifty could fall 26.50 points at the opening bell.



Most Asian stocks pulled back on Tuesday, as worries about a faltering global recovery kept investors out of riskier assets like stocks. Turnover was very light, with US markets closed on Monday, 5 July 2010, for Independence Day holiday. The key benchmark indices in Japan, Indonesia, Singapore and South Korea rose by between 0.2% to 1.49%. But, the key benchmark indices in China, Hong Kong and Taiwan fell by between 0.01% to 1.12%.

Trading in US index futures indicated that the Dow could shed 43 points at the opening bell on Tuesday, 6 July 2010. P> This week the focus will be squarely on how central banks will address signs of a coming global slowdown, with the European Central Bank and the Bank of England both holding policy meetings and the Reserve Bank of Australia and Bank of Korea meeting as well.

Back home, the services sector expanded at its fastest clip in two years last month, led by increases in business expectations and new orders, a survey showed on Monday, 5 July 2010. After dipping slightly in May 2010, the HSBC Markit Business Activity Index, based on a survey of 400 Indian firms, rose to 64 in June 2010 from 58.2 last month, pointing to a substantial rate of growth. Any figure above 50 indicates expansion.

The Reserve Bank of India (RBI) on Friday, 2 July 2010, hiked the repo rate by 25 basis points to 5.5% from 5.25%, with immediate effect. It also hiked the reverse repo rate, at which it absorbs excess cash from the banking system, by an equal 25 basis points to 4% from 3.75%. The central bank said the latest rate hike is a part of the calibrated exit from the expansionary monetary policy.

The above monetary measures should contain inflation and anchor inflationary expectations going forward, while not hurting the recovery process, the central bank said in a statement. This mid-cycle policy action has been warranted by the evolving macroeconomic situation, it said.

Although entirely justified in terms of long-term fiscal and energy conservation objectives, the recent increase in fuel prices will have an immediate impact of around one percentage point on inflation based on wholesale price index (WPI), with second round effects also being felt in the months ahead, the Reserve Bank of India said. Significantly, two-thirds of WPI inflation in May 2010 was contributed by non-food items, suggesting that inflation is now very much generalised and that demand-side pressures are evident, the RBI said.

The central bank's monetary policy stance is of calibrated exit from the expansionary monetary policy, with focus on containing inflation and anchoring inflationary expectations without hurting growth. This is the first rate action by the central bank after banks switched over to the new base rate system from 1 July 2010.

To address what it said was temporary and unexpected tight liquidity in the financial system, the RBI also on Friday extended an earlier measure to infuse cash into the system.

Two-thirds of WPI inflation in May 2010 was contributed by non-food items, suggesting that inflation is now very much generalised and that demand-side pressures are evident, the central bank said in a statement. WPI inflation increased to 10.2% in May 2010, up from 9.6% in April 2010.

In its April 2010 policy review, the Reserve Bank projected real GDP growth for 2010-11 at 8% with an upside bias. More recent data suggest that the upside bias has largely materialized, thecentral bank said. The growth projection will be reviewed in the first quarter review on 27 July 2010, RBI said.

Analysts expect another 25 basis points rate hike by the central bank at its quarterly review on 27 July 2010.

Investors are also closely watching the progress of the monsoon rains. The monsoon rains have revived after weak rains last month. The weather office on Monday, 5 July 2010, said monsoon rains have advanced into the country's key grain-producing states of Punjab and Haryana and is forecast to progress further. Crop planting suffered last month as rainfall was 16% below normal, but the seasonal shortfall has narrowed to 14% for the June 1-July 3 period after heavy rains.

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 south-west monsoon usually covers the entire country by mid-July. 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.

Coming back to stocks, the next major trigger for the market is Q1 June 2010 results of India Inc, which will start trickling in from the second week of July 2010. Advance tax collections for the first quarter of the current financial year point to a strong growth in corporate sector profits. Advance tax payments by companies during the April-June quarter account for 15% of the total advance tax payable in the fiscal year

The key benchmark indices edged marginally lower in lacklustre trade on Monday, 5 July 2010 with volumes hit by a nationwide strike called by opposition parties to protest against the government's decision to raise fuel prices. The BSE 30-share Sensex fell 19.51 points or 0.11% at 17,441.44 on Monday.

As per provisional figures on NSE, foreign funds sold shares worth Rs 220.55 crore and domestic funds sold shares worth Rs 51.23 crore on Monday.