Most sectoral indices on BSE in red

The key benchmark indices edged lower on the first day of the week on doubts over global economic recovery. European stocks and US index futures declined. The BSE 30-share Sensex lost 116.25 points or 0.64%, off close to 155 points from the day's high and up close to 50 points from the day's low. The BSE Sensex settled above the psychological 18,000 mark after falling below that level for a brief period in mid-afternoon trade. IT, Realty and metals stocks fell. Index heavyweight Reliance Industries (RIL), too, edged lower. The market breadth was weak, in contrast to a strong breadth earlier in the day.



A bout of volatility was witnessed in initial trade as the key benchmark indices swung between gains and losses. The market was a tad higher in morning trade as some Asian stocks came off initial lows and as US index futures reversed initial losses. The market hit fresh intraday high in mid-morning trade as Asian stocks extended gains after earlier recovering from lows.

The Sensex recovered soon after erasing entire intraday gains in early afternoon trade after the monthly inflation data hit the market at about 12:00 IST. The market slipped into the red in afternoon trade. The market soon regained positive zone. Stocks came off highs in afternoon trade. The market slumped to fresh intraday low in mid-afternoon trade as European stocks turned negative and as US index futures edged lower.

NSE's volatility index, India VIX, a gauge of traders' perception of near-term risks in the market based on options prices, jumped 8.18% to 18.11. The sharp rise followed a steep 7% decline in the index on Friday, 13 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.

Investors are closely watching the progress on the proposed tax reforms, such as the introduction of the goods and services tax (GST) and the proposed overhaul of the direct tax regime. The government is trying to reform the indirect tax regime through a single levy, the goods and services tax (GST), in place of a plethora of central and state indirect taxes. The government is keen to introduce GST from 1 April 2011. It remains to be seen if the constitutional amendment required for the introduction of the GST is passed by both the Houses of Parliament in the current monsoon session.

According to reports, the current monsoon session of Parliament is likely to be extended by a week. As per earlier schedule, the session, which started on 26 July 2010, was to be concluded on 27 August 2010. The government is also likely to place in parliament the Bill on the Direct Taxes Code (DTC). The Direct Tax Code (DTC) is being proposed as a replacement for the Income Tax Act, 1961, and is likely to come into effect from April 2011.

The latest data showed the wholesale price index (WPI) rose an annual 9.97% in July 2010, slower than expectations. The annual food inflation rate fell to 10.29% in July 2010 from 14.6% rise in June 2010, with prices of vegetables and sugar falling on the month. Manufacturing inflation, which the RBI uses as a proxy for assessing demand, cooled to 6.15% from 6.66% in June 2010.

On the flip side, the headline inflation for May 2010 was revised upwards to 11.14% from 10.16%. Planning Commission deputy chairman Montek Singh Ahluwalia said India's headline inflation is still high and is not acceptable.

The yield on benchmark 10-year 2020 bond was almost unchanged for the day at 7.82%. The yield on the second most traded, 8.13% 2022 bond was hovering at 7.92%.

Prime Minister Manmohan Singh on Sunday, 15 August 2010, said it is the responsibility of the government to manage the economy with prudence so that our development is not affected adversely in the future because of high debt. In his speech to mark India's 63rd Independence Day, Singh defended the government's decision to raise fuel prices as a measure of fiscal prudence, saying the government was making every effort to tackle double-digit inflation that is hurting the poor. "The subsidy on petroleum products has been increasing every year. It had become necessary therefore to increase the prices of petroleum products. If this had not been done, it would not have been possible for our budget to bear the burden of subsidy," Singh said.

The Prime Minister also called for raising the annual farm growth rate to 4%, and said the government has given incentives to farmers to encourage production. "But one effect of providing higher prices to farmers is that food prices in the open market also increase," he said.

The Prime Minister renewed his call to the Maoists and Kashmiri rebels to abjure violence and come for talks with the government. He also urged dialogue to resolve differences with old rival Pakistan. "We expect from them that they would not let their territory be used for acts of terrorism against India," Singh said.

European shares pulled back from early gains to trade lower on Monday, 16 August 2010, as losses from banks offset deal-related gains from Vedanta Resources and Cairn Energy. The key benchmark indices in UK, France and Germany were down by 0.18% to 0.89%.

Asian shares came off initial lows on Monday, 16 August 2010, led by rally in Chinese stocks. Financial shares were leading the Chinese market higher after Agricultural Bank of China said on Sunday, 15 August 2010, that it fully exercised the over allotment, or greenshoe, option on the Shanghai portion of its initial public offering. The Shanghai Composite index was up 2.11%. Hong Kong's Hang Seng was up 0.19% and the Taiwan Weighted index was up 0.63%.

Japan's Nikkei Average fell 0.61% after the latest data showed Japan's economy lost significant momentum last quarter. Gross domestic product grew at an annualized rate of 0.4% the government said Monday. The result undershot analysts' expectations and represents a sharp slowdown from the previous quarter's revised 4.4% expansion

In other Asian stocks, the key benchmark indices in Indonesia, Singapore and South Korea were down by between 0.01% to 0.22%.

US index futures edged lower in volatile trade. Trading in US index futures indicated that the Dow could fall 18 points at the opening bell on Monday, 16 August 2010.

US stocks closed out their worst week in six with a small losses on Friday, 13 August 2010, as economic data gave little reason to reverse a string of sell-offs. US retail sales rebounded last month, as did the overall July Consumer Price Index, but the data was consistent with an economy that has slowed in recent months. The Dow Jones Industrial Average dropped 16.80 points, or 0.16%, to 10,303.15. The Standard & Poor's 500 Index dropped 4.36 points, or 0.40%, to 1,079.25. The Nasdaq Composite Index dropped 16.79 points, or 0.77%, to 2,173.48.

US consumer sentiment stabilized this month after a sharp drop in July, the Thomson Reuters/University of Michigan Surveys' preliminary August reading showed. Meanwhile, the Commerce Department said business inventories rose slightly more than expected in June.

Back home, in a move that will affect several top business houses, the Reserve Bank of India (RBI) on Friday, 13 August 2010 introduced minimum capital adequacy norms and limits to the amount that can be borrowed by core investment companies (CIC), which operate as holding companies. The guidelines issued on Friday said the holding companies need to have a minimum capital ratio whereby the adjusted net worth should not be less than 30% of their aggregate risk-weighted assets and risk-adjusted value of off-balance sheet items. RBI has also said that holding companies must ensure that their outside liabilities do not exceed 2.5 times their adjusted net worth. This restricts such companies from borrowing outside the group.

On the macro front, the industrial output rose 7.1% in June 2010 compared with revised 11.3% rise in May 2010, the latest data showed. Manufacturing grew 7.3%, mining sector grew 9.5%, consumer goods sector rose 8.3%, capital goods sector expanded 9.7% and electricity generation rose 3.5%.

The industrial production growth rate for May 2010 was revised marginally down to 11.3% from 11.5% reported earlier. The growth rate for March 2010 was revised upward to 14.5% from 13.9% reported earlier.

Analysts expect the Reserve Bank of India to raise interest rates by 25 basis points at a mid-quarter monetary policy review on 16 September 2010, to rein in inflation and inflation expectations.