Market may extend gains on higher Asian stocks; food inflation data eyed

The market may extend gains for the fourth straight day, tracking higher Asian stocks, which rose after positive economic data in the US. Trading of the S&P CNX Nifty futures on the Singapore stock exchange indicated that the Nifty could gain 9 points at the opening bell. On the macro front, the government will unveil data on some wholesale price indices for the year through 24 July 2010 viz. the food price index, the primary articles index and the fuel price index at about 12:00 IST today.



Index heavyweight Reliance Industries (RIL) may see action after the company said before market hours today that it will acquire 60% interest in Marcellus shale acreage in Pennsylvania.

Asian stocks rose towards a three-month highs on Thursday, 5 August 2010, led by Japanese equities after Toyota Motor Corp. boosted its annual profit forecast and US services sector output unexpectedly climbed. The key indices in Hong Kong, Indonesia Singapore, Japan, and Taiwan were up by 0.14% to 1.26%. But, the key benchmark indices in China and South Korea were down by between 0.4% to 0.5%.

US stocks rose in thin trade on Wednesday, 4 August 2010, as retailers' earnings and a report showing a slight improvement in private employment boosted optimism ahead of Friday's influential non-farm payrolls report. Data from the Institute for Supply Management showed the services sector grew at a faster pace than expected in July. In a separate report, payroll-processing company ADP said private employers added more jobs in July than forecast.

The Dow Jones Industrial Average gained 44.05 points, or 0.41% to 10,680.43. The Standard & Poor's 500 Index added 6.78 points, or 0.61% to 1,127.24. The Nasdaq Composite Index advanced 20.05 points, or 0.88% to 2,303.57.

Back home, foreign funds continue to mop up Indian equities. As per provisional figures on NSE, foreign funds bought shares worth Rs 688.69 crore on Wednesday, 4 August 2010. Domestic funds sold shares worth Rs 275.89 crore that day.

Foreign funds bought equities worth a net Rs 2024.24 crore in the first three trading days this month, absorbing selling of Rs 601.22 crore from domestic funds, as per data from the stock exchanges.

Foreign funds bought shares worth a net Rs 8320.50 crore in July 2010, absorbing selling by domestic institutional investors. Domestic funds sold shares worth a net Rs 6323.13 crore in July 2010.

Foreign funds had pumped in Rs 7713.97 crore in equities in June 2010, absorbing selling by domestic funds in that month. Domestic funds had dumped shares worth a net Rs 4777.05 crore in June 2010.

on the corporate front, the combined net profit of a total of 1,928 companies fell 9.5% to Rs 56766 crore on 20.8% rise in sales to Rs 7,014,84 crore in Q1 June 2010 over Q1 June 2009.

On the macro front, the surging services industry expanded for the 15th month in July, but at a slower pace than the two-year peak in June, with only growth in input prices picking up speed, a survey showed on Wednesday, 4 August 2010. The HSBC Markit Business Activity Index, based on a survey of 400 Indian firms, eased to 61.7 in July from 64 the previous month, staying comfortably above the 50 mark that divides growth from contraction.

The prices charged index saw a negligible fall from last month's levels, but the survey said it still pointed to another solid increase in rates charged by Indian service providers. Employment and outstanding business growth nearly ground to a halt, the survey showed.

The manufacturing expansion picked up pace in July 2010, driven by new orders, stronger factory output and rising prices even as hiring stagnated, a survey showed on Monday, 2 August 2010. The HSBC Markit Purchasing Managers' Index, based on a survey of 500 companies, edged up to 57.6 in July 2010 from 57.3 in June 2010 when it slipped from a multi-year high.

The factory output index jumped to a four-month high of 62.3 in July from 60.5 in the prior month, pointing to a rate of expansion in production that was above the trend since the end of the financial crisis, according to survey compilers Markit. But, Indian manufacturers shed jobs for the first time in four months in July.

Most automobiles firms including Tata Motors, Maruti Suzuki, Hero Honda and Bajaj Auto have reported strong sales in the month just gone by.

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. Over 64.7 million hectares had been brought under the crop cover by 22 July 2010. This is about 5.4 million hectares more compared with 59.3 million hectares planted last year till this date.

An overall 1% above-normal rainfall in whole July has facilitated extensive crop sowing even in the traditionally arid tracks of Rajasthan, Gujarat and Maharashtra. This has facilitated higher area coverage under rain-dependent, but high priced crops like cotton, pulses and coarse cereals. Kharif sowing is expected to be largely over by the middle of this month in most parts of the country.

The cumulative rainfall during the period from 1 June 2010 to 4 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, the India Meteorological Department (IMD) said late last week. 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%, it said.

The Southwest monsoon was vigorous over Saurashtra & Kutch and active over Arunachal Pradesh, Nagaland, Manipur, Mizoram & Tripura, Himachal Pradesh, West Rajasthan, Gujarat Region, Konkan & Goa, Madhya Maharashtra, Coastal Karnataka and Kerala during the past 24 bours, the IMD said in its daily update on Wednesday, 4 August 2010. The weather office expects fairly widespread rainfall over northwest & west India and northeastern states over the next few days

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.

Water level in main reservoirs was at 27% of capacity in the week to 29 July 2010, up from 19% in the previous week. Reservoirs are important for hydropower, which accounts for a quarter of the nation's generation capacity. They also provide water to irrigate winter crops such as wheat and rapeseed.

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 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.

Coming back to stocks, the key benchmark indices scaled 2-1/2-year highs on Wednesday, 4 August 2010, on strong services sector data and on revival of monsoon rains in the crucial sowing month of July 2010. The BSE 30-share Sensex jumped 102.61 points or 0.57% to 18,217.44, its highest closing level since 5 February 2008.