Market may open higher; RIL in focus after strong Q1 results

The market may open higher, as most Asian stocks rose. Trading of S&P CNX Nifty futures on the Singapore stock exchange indicated that the Nifty could rise 3 points at the opening bell. Index heavyweight Reliance Industries (RIL) may edge higher on strong Q1 results which the company announced after trading hours on Tuesday, 27 July 2010.



Volatility may remain high in the near future 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 on Thursday, 29 July 2010.

RIL's net profit jumped 32.3% to Rs 4851 crore on 86.7% increase in net turnover to Rs 58228 crore in Q1 June 2010 over Q1 June 2009. DLF, Mahindra & Mahindra, Sun Pharmaceutical Industries, HCL Technologies and Jindal Steel & Power's Q1 results are due today, 28 July 2010.

Most Asian stocks rose on Wednesday, 28 July 2010, as sentiment turned upbeat on a batch of strong corporate earnings results. The key benchmark indices in China, Japan, Hong Kong and Indonesia were up by between 0.23% to 1.88%. The key benchmark indices in Singapore, South Korea and Taiwan were down by between 0.02% and 0.13%.

In US market action, the S&P snapped a three-day winning streak on Tuesday, 27 July 2010, after mixed earnings reports and a fall in consumer confidence. The Dow Jones Industrial Average added 12.26 points, or 0.12% to 10,537.69. The Standard & Poor's 500 Index dipped 1.17 points, or 0.10% to 1,113.84. The Nasdaq Composite Index shed 8.18 points, or 0.36% to close at 2,288.25.

Economic data was mixed. Home prices rose in May, but labor-market worries took July consumer confidence to its lowest since February, hurt by worries about the job market, according to a report from the Conference Board, a private research group.

Closer home, 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 hiked repo rate by 25 basis points to 5.75% and the reverse repo rate by 50 basis points to 4.50%, with immediate effect. The central bank kept cash reserve ratio (CRR) unchanged at 6%. Cash reserve ratio is the amount of deposits that a bank must set aside with RBI.

While the quarter-point increase in repo rate was in line with expectations, the half-point rise in the reverse repo rate was twice what the market expected. Repo rate is the rate at which banks borrow from RBI. Reverse repo rate is the rate at which RBI borrows money from banks.

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 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 RBI said the hike in short-term interest rates is expected to moderate inflation by reining in demand pressures and inflationary expectations. It will help maintain financial conditions conducive to sustaining growth, generate liquidity conditions consistent with more effective transmission of policy actions and reduce the volatility of short-term rates in a narrower corridor.

The Reserve Bank of India (RBI) said it will henceforth undertake mid-quarter policy reviews. The mid-cycle reviews, due in June, September, December and March months are intended to take the surprise element out of off-cycle actions, it said. The next mid-quarter policy review will be held on 16 September 2010 and the next quarterly review will be done on 2 November 2010.

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 27 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. Monsoon rainfall has been three times the normal level in the main soybean region in the past two to three days, reports suggest. In southern India, where rice, cane and corn are grown, rainfall has been a quarter above average in recent days.

The Southwest monsoon was vigorous over Saurashtra & Kutch and active over Uttarakhand, Himachal Pradesh, East Rajasthan, West Madhya Pradesh, Konkan & Goa and South Interior Karnataka during past 24 hours, India Meteorological Department (IMD) said in its daily update on Tuesday, 27 July 2010. The weather office expects increase in rainfall activity over central and north Peninsular India this week.

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 628 companies fell 12.2% to Rs 33169 crore on 25.3% rise in sales to Rs 435356 crore in Q1 June 2010 over Q1 June 2009.

Coming back to stocks, the key benchmark indices eked out small gains 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.

As per provisional figures on NSE, foreign funds sold shares worth Rs 22.80 crore and domestic funds sold shares worth Rs 222.28 crore on Tuesday.