Sensex swings between positive and negative zone

The key benchmark indices swung between gains and losses in early trade after the Reserve Bank of India after trading hours on Friday, 2 July 2010, hiked key interest rates by 25 basis points to tame inflation. Interest rate sensitive banking stocks rose while realty stocks fell after the rate hike. Reliance Natural Resources (RNRL), slumped due to unfavorable swap ratio for its merger with group company Reliance Power (RPower). RPower surged.



The market breadth was strong as buying was witnessed in select mid-cap and small-cap stocks. The BSE 30-share Sensex was up 8.15 points or 0.05%, off close to 30 points from the day's high and up about equal points from the day's low.

The BSE clocked a turnover of Rs 363 crore by 9:30 IST. The overall volumes on the bourses may remain low today as opposition parties have called a nationwide Bharat Bandh today, 5 July 2010, to protest against the government's decision to raise fuel prices.

The Reserve Bank of India (RBI) after trading hours 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.

Most Asian stocks rose on Monday on optimism the Asian region will continue to grow even as there are mounting concerns about the pace of the global recovery. The key benchmark indices in Japan, Taiwan, South Korea and Indonesia rose by between 0.06% to 0.81%. But, the key benchmark indices in China and Hong Kong fell by between 0.32% to 1.65%.

US stocks fell on Friday, 2 July 2010 as disappointing jobs data joined other recent evidence pointing to a tepid economic recovery. Non-farm payrolls fell in June 2010 for the first time this year, adding to a slew of economic reports signaling the US recovery is slowing.

The Dow Jones Industrial Average dropped 46.05 points, or 0.47% to 9,686.48. The Standard & Poor's 500 Index lost 4.79 points, or 0.47% to 1,022.58. The Nasdaq Composite Index fell 9.57 points or 0.46% to 2,091.79. The Labor Department reported non-farm payrolls dropped by 125,000 in June 2010, the largest decline since October and affected by the loss of temporary government census jobs. The unemployment rate fell to 9.5%, the lowest level since July.

US markets remain closed on Monday, 5 July 2010, for Independence Day holiday.

Back home, a survey showed manufacturing growth cooled in June 2010 after a surge in activity the prior month, mainly due to slowing production and rapidly easing input price pressures. The HSBC Markit Purchasing Manager's Index, based on a survey of 500 Indian companies, slipped to 57.3 in June from 59 in May, which was the highest in more than two years. Despite an increase in workloads and outstanding business, manufacturers did not add new jobs to their payrolls in June, leaving the employment index stagnating.

The government on 25 June 2010, raised petrol price by Rs 3.50 a litre, diesel price by Rs 2 litre, kerosene by Rs 3 litre and LPG by Rs 35 per cylinder. The government has decided to decontrol petrol prices. The government will also eventually decontrol diesel prices, Oil Secretary S. Sundareshan said on 25 June 2010. The government will, however, continue to subsidize kerosene and LPG.

Investors are closely watching the progress of the monsoon rains. The weather office on Sunday, 4 July 2010, said monsoon rains have advanced to almost all oilseed-growing regions in central and western India, and may cover the entire country in 3-4 days. The spurt in rainfall in recent days will boost planting of rice, soybean and groundnut. 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 India Meteorological Department said monsoon rains had advanced to all parts of Gujarat, a key groundnut producer, and most parts of Madhya Pradesh, the main soybean region. "Conditions are becoming favourable for further advance of monsoon into remaining parts of the country during next 3-4 days," it said in its latest forecast.

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.

On the corporate front, most Indian firms, including Reliance Industries, L&T, Tata Steel and Tata Motors, have paid higher advance tax in Q1 June 2010 over Q1 June 2009. Higher advance tax payment normally indicates higher profits for the period under review. Advance tax payments by companies during the April-June quarter account for 15% of the total advance tax payable in the fiscal year.

At 9:20 IST, the BSE 30-share Sensex was up 8.15 points or 0.05% at 17,469.11. The Sensex rose 42.98 points at the day's high of 17,503.93 in early trade. The Sensex fell 20.86 points at the day's low of 17,440.09 in early trade.

The S&P CNX Nifty was up 1.30 points or 0.02% to 5,238.40.

The BSE Mid-Cap index was up 0.47%. The BSE Small-Cap index was up 0.45%. Both these indices outperformed the Sensex.

The market breadth, indicating the strength of the broader market, was strong. On BSE, 396 shares advanced while 191 shares declined. A total of 18 shares remained unchanged.

From the 30 share Sensex pack, 21 stocks fell and rest rose.

Index heavyweight Reliance Industries (RIL) was flat. As per recent reports the Mukesh Ambani group is close to signing an equal joint venture agreement with global private equity and hedge fund company, DE Shaw, to enter the financial services sector.

RIL recently announced its seventh oil discovery in Cambay basin in Gujarat. RIL and Reliance Natural Resources (RNRL) on 25 June 2010, entered into a new gas supply agreement, as directed by the Supreme Court. The Supreme Court had ordered the two companies to renegotiate the Gas Supply Master Agreement, which was signed between the Ambani brothers as part of the business demerger in 2005.

India's largest FMCG maker by sales Hindustan Unilever fell 1% and was the top loser from the Sensex pack.

Cipla rose 0.68% was the top gainer from the Sensex pack

Reliance Natural Resources (RNRL), slumped 26.55% due to unfavorable swap ratio for its merger with group company Reliance Power (RPower). RPower surged 4.08%. Anil Dhirubhai Ambani Group's (ADAG's) gas transportation company, Reliance Natural Resources (RNRL), will merge with sister firm Reliance Power (R-Power) in a Rs 50,000-crore, all-stock deal. The board of directors of the two companies, in meetings held on Sunday, approved a swap ratio of 4:1, meaning RNRL shareholders are to get one R-Power share for every four they hold.

Interest rate sensitive realty stocks fell after the central bank hiked interest rates sooner than expected. DLF, Unitech, Phoenix Mills, Omaxe and Anant Raj Industries fell by between 0.14% to 1.51%.

Bank stocks rose even as the central bank hiked interest rates sooner than expected. India's second largest private sector bank by operating income HDFC Bank rose 0.17%, with the stock gaining for the second straight day. HDFC Bank has set its base rate at 7.25%. India's largest private sector bank by market capitalisation ICICI Bank rose 0.29%. The bank set its base rate for loans at 7.5% effective Thursday, 1 July 2010, as part of a new rule to set minimum lending rates.

India's biggest commercial bank in terms of branch network, State Bank of India, rose 0.25%, with the stock gaining for the second straight day. SBI announced last week it has fixed the base rate at 7.5% per annum with effect from 1 July 2010.

Among other PSU banks, Punjab National Bank and Bank of Baroda fell by between 0.24% to 1.11%. But, Bank of India rose 0.28%.

India's largest dedicated housing finance firm by revenue HDFC fell 0.24%. HDFC has launched "Dual Rate Product - 3", a special home loan product at a fixed rate of 8.25% per annum up to 31 March 2011, 9.25% for the period between 1 April 2011 and 31 March 2012 and the applicable floating rate for the balance term. This special offer is applicable to all new home loan customers who apply before 31 August 2010 and take at least part disbursement before 30 September 2010, HDFC said.

The Reserve Bank of India introduced the new lending rate system with effect from 1 July 2010 to ensure that larger borrowers do not bargain for cheaper rates from banks, distorting their asset liability management.