Market may extend Wednesday's losses; food inflation data eyed

The market may edge lower for the second straight day as Asian stocks slipped on weak economic data in the US. Trading of S&P CNX Nifty futures on the Singapore stock exchange indicated that the Nifty could fall 8 points at the opening bell. Volatility may remain high as traders rollover positions in derivatives segment from July 2010 series to the August 2010 series ahead of the expiry of the near-month July 2010 contracts today, 29 July 2010.



On the macro front, the government will unveil data on some wholesale price indices for the year through 17 July 2010 viz. the food price index, the primary articles index and the fuel price index at about 12:00 IST today.

State Bank of India after market hours on Wednesday, 28 July 2010 announced the acquisition of its affiliate bank State Bank of Indore. The acquisition is effective from 26 August 2010.

A day after Reserve Bank of India (RBI) tightened the monetary policy, leading private sector lender HDFC Bank on Wednesday, 28 July 2010, decided to raise deposit rates by up to 0.75%. HDFC Bank will offer 5.25% interest, up from 4.5% on fixed deposits between 91 days and 6 months and 6.5% (existing 5.75%) between nine months and one year.

DLF's consolidated net profit rose 3.79% to Rs 411.03 crore in Q1 June 2010 over Q1 June 2009. Hero Honda Motors, Steel Authority of India, UltraTech Cement and ONGC among others will be announce Q1 result today, 29 July 2010.

Asian stocks retreated Thursday after disappointing news about the US economy sent Wall Street lower on Wednesday. The key benchmark indices in Japan, Hong Kong, Singapore, South Korea and Taiwan were down by between 0.02% to 0.54%. But, the key benchmark indices in China and Indonesia rose by between 0.06% to 0.13%.

Japan's retail sales in June rose for the sixth straight month, but the pace of growth is slowing, the latest data showed. The government said Thursday that June retail sales climbed 3.2% from a year earlier

US stocks fell on Wednesday on weak durable goods figures and a downbeat assessment of the economy from the Fed's Beige Book. The Dow Jones industrial average dropped 39.81 points, or 0.38% to 10,497.88. The Standard & Poor's 500 Index dropped 7.72 points, or 0.69% to 1,106.12. The Nasdaq Composite Index dropped 23.69 points, or 1.04% to 2,264.56.

The US Federal Reserve's Beige Book, a summary of national economic conditions, added to the disappointment. It indicated activity was not as robust in a few districts and had lost steam over the past several weeks. Meanwhile, new orders for long-lasting US manufactured goods unexpectedly fell for a second straight month in June, posting their largest decline since August 2009, a reminder of the challenges faced by the economy.

Closer home, 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 central bank said consumer price inflation remains at elevated levels and demand-side pressures need to be contained. The central bank also said real policy rates are not consistent with strong economic growth.

The dominant concern that has shaped the monetary policy stance in this review is high inflation, RBI Governor D Subbarao said in a statement. Non-food inflation has risen, and demand-side pressures are clearly evident. With growth taking firm hold, the balance of policy stance has to shift decisively to containing inflation and anchoring inflationary expectations, the RBI said.

The Reserve Bank of India said the economy could face a significant risk in the form of a slowdown in capital flows, at a time when the current account deficit is widening. In its first quarterly review of monetary policy, the Reserve Bank of India said that a potential slowdown in capital inflows could impact the current and trade deficit. The current deficit is already widening as imports continue to rise with the rebound in economic growth.

RBI has said that the risk of capital flows runs both ways. Given the present state of the global economy, central banks in advanced economies are likely to maintain accommodative monetary policies for an extended period. With the strong growth potential of emerging market economies, including India, this is likely to trigger large capital inflows. Large capital inflows above the absorptive capacity of the economy will pose a challenge for monetary and exchange rate management. This also has implications for asset prices. In this scenario, a widening current account deficit will help absorb a larger proportion of the inflows.

Meanwhile, 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 5% below normal during the period from 1 June 2010 to 28 July 2010, improving rapidly from a deficit of 16% on 19 July 2010 as the rain-bearing monsoon winds ended a weak phase in the middle of the month.

Heavy showers, mainly in soybean-growing areas in the past week, have raised hopes of a strong harvest in the world's leading consumer of rice, cooking oils and sugar. As per reports, rainfall has been well distributed over major crop-growing regions of the country.

The Southwest monsoon was active over Himachal Pradesh, Jammu & Kashmir, Madhya Maharashtra, South Interior Karnataka and Kerala during past 24 hours, India Meteorological Department (IMD) said in its daily update on Wednesday, 28 July 2010. The weather office expects increase in rainfall activity over central and northwest 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.

On the corporate front, the combined net profit of a total of 775 companies fell 10.2% to Rs 36921 crore on 25.5% rise in sales to Rs 487096 crore in Q1 June 2010 over Q1 June 2009.

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 on Wednesday.

As per provisional figures on NSE, foreign funds bought shares worth Rs 593.16 crore and domestic funds sold shares worth Rs 690.78 crore on Wednesday.