Banking, realty stocks lead decline

The key benchmark indices slumped on worries over the pace of the US economic recovery. US is the world's biggest economy. IT stocks fell after the Union Cabinet approved the new Direct Taxes Code bill wherein it proposed a hike in the rate of minimum alternate tax (MAT) on book profits to 20% from the prevailing 18%. Realty, metal and consumer durables stocks reversed initial gains. Banking stocks fell across the board. But, PSU OMCs rose. The market breadth was weak, in contrast with a strong breadth in mid-morning trade.



Index heavyweight Reliance Industries (RIL) edged lower after a hike in the rate of minimum alternate tax. The BSE 30-share Sensex lost 227.94 points or 1.25%, off close to 250 points from the day's high and up close to 55 points from the day's low. The Sensex fell below the psychological 18000 mark. Except the BSE Oil & Gas index, all the other sectoral indices on BSE fell.

Intraday volatility was high. The market recovered from lower level at the onset of the trading session. The intraday recovery gathered strength in morning trade as Asian stocks came off lows, led by recovery in Japanese shares. The market moved between positive and negative zone after hitting fresh intraday high in mid-morning trade. The Sensex hit a fresh intraday high mid-morning trade. The market once again slipped into the red later. The market extended losses to hit fresh intraday lows in mid-afternoon trade as European stocks extended initial losses and as US index futures reversed initial gains. The market slumped in late trade.

NSE's volatility index, India VIX, a gauge of traders' perception of near-term risks in the market based on options prices, jumped 14.86% to 19.63. The index had lost 9.67% at 17.09, on Thursday, 26 August 2010, a day after it had risen 11.36% to 18.92 on Wednesday, 25 August 2010. The index had lost 0.88% to 16.99 on Tuesday, 24 August 2010. India VIX is calculated based on the S&P CNX Nifty options prices. India VIX is a measure of the market's expectation of volatility over the next 30 calendar days.

The latest data from global fund tracker EPFR Global showed investors have become cautious about emerging market equities, an asset class that has been a standout for the past year. Global emerging market equity funds had net inflows of $322 million in the week ended 25 August 2010, the lowest total since a streak of inflows began 13 weeks ago. Asia-Pacific equity funds were relatively hard hit, posting outflows of $289 million for the week, on fears a US slowdown would hurt the region's exporters.

The finance ministry and the Reserve Bank of India (RBI) have reportedly started discussions to raise the cap on foreign fund investments in debt from $20 billion a year. The talks come at a time when India needs strong capital inflows to finance a high current account deficit, a newspaper report said. Foreign institutional investors (FIIs) are currently allowed to invest up to $20 billion every year in bonds -- $15 billion in government bonds and $5 billion in corporate bonds. They have poured in $16 billion this fiscal, reports suggest. The limit on investment in government bonds has already been reached, as per reports.

Meanwhile, the Union Cabinet on Thursday approved a new set of direct tax rules that propose to raise income tax exemption limit from 1.6 lakh to 2 lakh, leaving more money in the hands of individuals, and a lower tax rate for companies. The much-awaited Direct Taxes Code, or DTC, Bill, which seeks to replace the nearly 50-year-old income tax law, is likely to be introduced in Parliament on Monday, 30 August 2010, and may then be referred to a select committee of members of both houses of Parliament.

The basic exemption limit is proposed to be raised to 2 lakh from the current 1.6 lakh and corporate tax rate for both domestic and foreign companies is proposed at 30%, finance minister Pranab Mukherjee said after the meeting of the Union Cabinet. Senior citizens and women will enjoy a higher exemption of up to 2.5 lakh. There will be no surcharge or cess on companies, thereby bringing the corporate tax rate to 30% from present 34%. The new changes in the tax rates, expected to come into effect from 1 April 2011, could lead to some loss in revenue and raise the government's deficit.

The new code proposes three income tax slabs -- income of up to 2-5 lakh will face 10%, 5-10 lakh will attract 20% and income over 10 lakh will face tax at the rate of 30%. The housing loan exemption of 1.5 lakh would also be available to individual taxpayers on the interest component.

However, the government proposes to raise the minimum alternate tax (MAT) on book profits to 20% from current 18%. The move will be a big blow for Reliance Industries (RIL) and a host of IT and infrastructure companies that pay MAT.

Investors are keenly watching data on sowing for the kharif harvest. Overall, nearly 90% of the total normal kharif acreage was seeded till 20 August 2010 and the standing crops are reportedly in good shape. The southwest monsoon rains were 29% above normal in the week to 25 August 2010. There were good showers over Bihar, Jharkhand and West Bengal, where the seasonal rains were scanty until last week. That will help farmers in these areas grow coarse cereals, pulses and fodder.

The cumulative rainfall during the period from 1 June 2010 to 25 August 2010 was 2% below normal. Rainfall over the country as a whole for the second half (August to September) of the 2010 southwest monsoon season is likely to be normal, according to the India Meteorological Department (IMD). Quantitatively, rainfall for the country as a whole during the period August-September 2010 is likely to be 107% of long period average (LPA) with a model error of plus/minus 7%, according to the weather office.

The revival in monsoon rains has raised water level in reservoirs to 55% of capacity, up 6 percentage points in the past week. More water in reservoirs will boost the supply of hydropower, which shares for a quarter of India's total generation capacity, and help irrigate crops even after the monsoon season.

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. If the southwest monsoon for the June-September monsoon season turns out good and if it is well distributed, it will help raise farm output, boost rural incomes and lower food inflation.

European stocks edged higher in volatile trade on Friday, as investors remained wary ahead of economic data that will give an insight into the health of the U.S. economy, and a speech on the economic outlook by Federal Reserve Chairman Ben Bernanke. The key benchmark indices in France, Germany and UK were up by between 0.06% to 0.13%.

Britain's economy grew faster than originally estimated in the second quarter of this year, hitting its fastest rate of growth in more than nine years, official data showed on Friday. The Office for National Statistics said the economy grew by 1.2% in the three months to June, up from its preliminary estimate of 1.1%.

Japanese stocks led a recovery in Asian stocks on Friday, 27 August 2010. The Nikkei 225 Average rebounded from a 1% loss earlier in the day to end 0.95% higher on hopes of government action to stem the rise in the yen. Shares of Japanese exporters rose as the yen declined on reports Japanese Prime Minister Naoto Kan is set to speak with reporters later in the day to discuss steps to boost the economy and possibly measures to ease the yen's recent strength.

Japanese Prime Minister Naoto Kan told reporters on Friday, 27 August 2010, that he was ready to take decisive action in currency markets when needed, news reports said. Kan said excessive currency moves can undermine financial stability and that he hoped the Bank of Japan would take appropriate steps on monetary policy, agency reports said. Japanese authorities have been seeking to arrest the rise of the soaring Japanese yen, which hit a 15-year high versus the US dollar earlier this week.

In other Asian markets, the key benchmark indices, China, Singapore and Taiwan were up by between 0.28% to 0.44%. But, some other Asian markets remained in the red as investors nervously awaited a speech by Federal Reserve Chairman Ben Bernanke later in the global day amid growing worries over the pace of the US economic recovery. The key benchmark indices in Hong Kong, Indonesia and South Korea were down by between 0.01% to 1.28%.

In US market action on Thursday, 26 August 2010, the Dow Jones Industrial Average closed below 10,000, a day ahead of an expected downward revision in US second-quarter economic growth and ahead of a speech by Federal Reserve Chairman Ben Bernanke. Stocks initially rose on data showing first-time claims for jobless benefits fell more than expected last week, but the number was still too high to signal a shift in the weak labor market. The Dow Jones Industrial Average fell 74.25 points, or 0.74% to 9,985.81. The Standard & Poor's 500 Index shed 8.11 points, or 0.77% to 1,047.22. The Nasdaq Composite Index lost 22.85 points, or 1.07% to 2,118.69.

Trading in US index futures indicated that the Dow could gain 32 points at the opening bell on Friday, 27 August 2010. US index futures swung between gains and losses

Closer home, on macro front, food inflation declined further in the middle of this month even as prices of fuels remained steady, the latest data showed. Inflation in the Food Articles group stood at 10.05% for the week ended 14 August 2010, versus 10.35% in the previous week, the Commerce & Industry Ministry said. Inflation in the Primary Articles group stood at 14.75% in the week under review as against 14.85% in the week ended 7 August 2010. Inflation in the Fuel & Power group was unchanged at 12.57%. But, inflation in the Non-food Articles group rose to 22.20% from 21.70% in the preceding week.

The Reserve Bank of India (RBI) said in its annual report for 2009-2010 released early this week that the relative price variability has declined since November 2009 despite inflation remaining high, which indicates that the inflation has become increasingly generalised, and hence, requiring appropriate monetary policy actions to anchor inflation expectations. Persistent large fiscal deficit has several adverse macroeconomic risks, ranging from higher inflation to lower savings, crowding-out pressures on private investment, decline in potential output, and worsening of external imbalances, the RBI said in the report.

In a globalised world, a congenial global economic environment and a sustainable balance of payments position are critical for achieving the policy goal of stable growth, the RBI said in the annual report. Despite lower trade deficit, the decline in invisibles surplus led to a higher current account deficit of 2.9% of GDP during 2009-10 as compared with 2.4% of GDP a year ago. A higher current account deficit led to stronger absorption of foreign capital, the RBI said.

Given the stronger growth outlook of India and the probability of monetary exit being delayed by the advanced economies, capital inflows could be expected to accelerate, which will have to be managed, as in the past, the central bank said. The government's borrowing programme for 2010-11 has to be managed, keeping in view the pressure on yield from the elevated inflation, gradual withdrawal of excess liquidity and stronger pick-up in the private sector credit demand, the RBI said.

Going forward, as the monetary position is normalised, addressing structural constraints in several critical sectors is necessary to sustain growth and also contain supply side risks to inflation. The Reserve Bank of India has stated its commitment to containing inflation through its calibrated monetary policy normalisation, with clarity on the direction of the policy rates in the near-term as well as timely actions in cautious steps based on careful assessment of risks to both inflation and growth.

The conduct of monetary policy of the Reserve Bank of India, while being driven by the domestic outlook, will have to recognise the possibility of sudden changes in the global outlook, the central bank said. While managing global shocks, India will also have to increase its resilience and productivity levels so as to strengthen its position in the global economy, the RBI annual report said.

The infrastructure gap of India, both in relation to other major countries and its own growing demand, has been a key factor affecting the overall productivity of investments. The requirement of high initial capital outlay, that too over longer terms, necessitates measures to address the financing constraint to capacity expansion in infrastructure, the central bank said.

Bond yields declined today, 27 August 2010. The yield on the benchmark 10-year 2020 bond was hovering at 7.97%, lower than Thursday's (26 August 2010) close of 8.03%. The yield on the second most traded, 8.13% 2022 bond was hovering at 7.98%, slightly higher than Thursday's (26 August 2010) close of 8%.

The Reserve Bank of India (RBI) at its Q1 monetary policy on 27 July 2010 raised a key lending rate by 25 basis points to curb surging inflation. With growth taking firm hold, the balance of policy stance has to shift decisively to containing inflation and anchoring inflationary expectations, the RBI said at that time. The RBI also at that time 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.

Coming back to stocks, foreign funds sold shares worth Rs 276.62 crore on Thursday, 26 August 2010, as per provisional data from the stock exchanges. Domestic funds bought shares worth Rs 38.93 crore on that day.

The BSE 30-share Sensex was down 227.94 points or 1.25% to 17,998.41. The Sensex rose 22.01 points at the day's high of 18,248.36 in mid-morning trade. The index fell 282.19 points at the day's low of 17,944.16 in late trade.

The S&P CNX Nifty was down 69.20 points or 1.26% to 5,408.70.

The market breadth, indicating the health of the market, was weak in contrast with positive breadth earlier in the day. On BSE, 2094 shares declined while 886 shares advanced. A total of 81 shares remained unchanged.

From the 30-share Sensex pack, 26 stocks declined while the rest of them advanced.

The BSE Mid-Cap index fell 0.95%, outperforming the Sensex. The BSE Small-Cap index fell 1.38%. It underperformed the Sensex.

BSE clocked turnover of Rs 5276 crore, higher than Rs 4862.55 crore on Thursday, 26 August 2010.

Index heavyweight Reliance Industries (RIL) fell 0.73% to Rs 949.75, with the stock falling for the fifth straight day. The stock hit a high of Rs 970 and a low of Rs 946.65. The government's proposal to raise the minimum alternate tax (MAT) on book profits to 20% from current 18% will affect the profitability of the company. RIL pays MAT.

Mukesh Ambani, chairman and promoter of Reliance Industries (RIL), recently restructured his shareholding in the company by transferring his 34% stake to a set of investment firms, which include a large number of limited liability partnerships (LLPs). The company or its promoters did not disclose the reason behind the rejig in shareholding of the promoter group. Reports suggested the move is aimed at streamlining the holding of various promoter groups in a tax-friendly manner.

Meanwhile, Reliance Industries is reportedly close to inking a deal with global hedge fund DE Shaw to launch a $700-$800 million infrastructure fund.

India's largest oil & gas exploration firm by sales ONGC rose 2.87% after the company discovered oil in a block on the western onshore basin, which the company had won under the sixth round of the New Exploration Licensing Policy. Meanwhile, the company's board approved investment of Rs 372.11 crore for development of BHE and BH-35 Area in western offshore. The stock was the top gainer from the Sensex pack.

PSU OMCs rose as crude oil fell, heading for its third weekly decline on lingering doubts over the outlook for US oil demand. US crude for delivery in October fell 17 cents to $73.19 a barrel, after touching an intraday trough of $70.76 on Wednesday, 25 August 2010, the lowest price since early June. Prices have slid about $10 from a peak near $83 on 4 August 2010.

HPCL, Indian Oil Corporation (IOC) and BPCL rose by between 1.29% to 1.89%. For Indian state-run oil refining and marketing firms, the recent steep fall in crude oil prices augurs well as it will reduce under-recoveries on domestic sale of diesel, LPG and kerosene at government controlled prices. The government recently decontrolled petrol prices.

Most metal stocks reversed initial gains. Sterlite Industries, Hindustan Zinc, Hindalco Industries, Steel Authority of India, Sesa Goa, Jindal Saw, JSW Steel, Jindal Steel & Power and National Aluminum Company fell by between 0.07% to 2.38%.

LMEX a gauge of six metals traded on the London Metal Exchange, rose 2.63% on Thursday, 26 August 2010.

Realty stocks reversed initial gains. Omaxe, HDIL, Anant Raj Industries, Unitech, Parsvnath Developers, Sobha Developers, Indiabulls Real Estate, DLF fell by between 0.35 % to 3.84%.

Shares of software exporters fell after the Union Cabinet approved the new Direct Taxes Code bill wherein it proposed a hike in the rate of minimum alternate tax on book profits to 20% from the prevailing 18%. India's second largest software services exporter by sales Infosys was down 1.98%, with stock falling for the second straight day. India's largest software services exporter by sales TCS fell 2.1%. India's third largest software services exporter Wipro was down 0.88%, with the stock falling for the fourth straight day.

Banking stocks fell on profit taking. India's largest bank by net profit and branch network State Bank of India fell 2.16%. Chairman O.P. Bhatt said on Wednesday, 25 August 2010, the bank has no plans to raise lending rates further in the short term.

Punjab National Bank, Bank of India and Bank of Baroda fell by between 1.66% to 3.37%.

India's largest private sector bank by net profit ICICI Bank fell 2.84%. India's second largest private sector bank by net profit HDFC Bank fell 1.7%, with the stock falling for the third straight day.

FMCG stocks also fell on profit taking. ITC, Hindustan Unilever, Nestle India, Marico, Dabur India and Britannia Industries fell by between 0.5% to 2.39%.

Consumer durables stocks reversed initial gains. Videocon Industries, Titan Industries, Gitanjali Gems, Blue Star and Rajesh Exports fell by between 0.14% to 3.36%.

Auto stocks reversed initial gains. Maruti Suzuki, India's top car maker by sales fell 0.73%. Maruti's marketing and sales chief Mayank Pareek on Thursday said the company is witnessing good sales this month.

India's top truck maker by sales Tata Motors fell 0.7%. Chief Executive Carl-Peter Forster on Thursday, 26 August 2010, said Tata Motors may raise up to $1 billion through a mix of instruments. Tata Motors had said in June it would raise about Rs 4700 crore through shares, bonds, debentures and other equity-linked instruments to cut debt and grow its business

India's largest bike maker by sales Hero Honda Motors fell 3.18%. India's second largest bike maker by sales Bajaj Auto was flat.

India's top tractor maker by sales Mahindra & Mahindra fell 1.4%. The company recently signed a memorandum of understanding to buy a majority stake in troubled South Korean automaker Ssangyong

Cals Refineries clocked the highest volume of 2.47 crore shares on BSE. FCS Software (1.76 crore shares), Prakash Steelage (1.53 crore shares), Ispat Industries (1.15 crore shares) and Sanraa Media (1.11 crore shares) were the other volume toppers in that order.

Piramal Healthcare clocked the highest turnover of Rs 497.31 crore on BSE. Prakash Steelage (Rs 337.34 crore), Great Offshore (Rs 179.06 crore), Tata Steel (Rs 135.64 crore) and Reliance Industries (Rs 127.22 crore) were the other turnover toppers in that order.