Market may edge lower on weak Asian stocks

The market may edge lower as most Asian stocks fell ahead of a key economic data in the US. Trading of the S&P CNX Nifty futures on the Singapore stock exchange indicated that the Nifty could fall 9.50 points at the opening bell.



Engineering and construction giant Larsen & Toubro intends to unlock value of all its major subsidiaries by making them separate entities, beginning with a public float of its finance arm by the end of this calendar year. The conglomerate also plans to foray into the banking sector with its finance arm and is waiting for policy clarity from the regulator, L&T Chairman and Managing Director Anil M Naik told reporters on the sidelines of the company's 65th annual general meeting on Thursday, 26 August 2010.

ONGC today said its board approved investment of Rs. 372.11 crore for development of BHE and BH-35 Area in western offshore.

Most Asian stock markets fell on Friday, 27 August 2010, 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 South Korea, Indonesia, Japan, Hong Kong and Taiwan fell by between 0.02% to 0.61%. But, key benchmark indices in China, Singapore and Hong Kong were up by between 0.17% to 0.87%.

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.

Closer home, the Union Cabinet on Thursday approved a new set of direct tax rules that proposes 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.

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.

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 -- a touch higher than normal rate -- government data showed on Thursday, 26 August 2010. Normally, water level in reservoirs rises by 5 percentage points to 56% of capacity at this time of the year. 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.

The Reserve Bank of India (RBI) said in its annual report for 2009-2010 released on Tuesday, 24 August 2010, 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.

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 on BSE. Domestic funds bought shares worth Rs 38.93 crore on that day.

The key benchmark indices eked out small gains on Thursday, 26 August 2010, amid high volatility, as reports of above-normal rains in the week ended Wednesday, 25 August 2010, triggered bargain hunting after a two day slide. Volatility was high as traders rolled positions in the derivatives segment from the near-month August 2010 series to September 2010 series as August 2010 derivatives contracts expired on 26 August 2010. The BSE 30-share Sensex rose 46.71 points or 0.26% to 18,226.35.