Market snaps seven-day winning streak as IT stocks slide

The key benchmark indices edged lower as profit taking emerged after a recent solid surge. The market today, 16 September 2010, snapped a seven day winning streak. Weak European and Asian stocks and lower US index futures weighed on investor sentiment. Intraday volatility was immense. The BSE 30-share Sensex lost 84.62 points or 0.43%, off close to 225 points from the day's high and up close to 35 points from the day's low.



From a recent low of 18,221.43 on 3 September 2010, the Sensex had risen 1,280.68 points or 7.02% in seven trading sessions to 19502.11 on Tuesday, 15 September 2010.

Coming back to today's trade, the market breadth was weak. Banking and realty shares rose after the Reserve Bank of India (RBI) signaled that it may be nearing a pause in its current tightening cycle. Metal stocks declined as metal prices fell on the London Metal Exchange on Wednesday, 15 September 2010. IT stocks slipped on worries about a slow global economic recovery.

Intraday volatility was high. The key benchmark indices scaled 32-month highs in early trade, extending a recent solid surge, as data showing heavy buying by foreign funds recently and higher advance tax payments by prominent Indian firms, boosted sentiments. The market slipped into the red in morning trade, as most Asian stocks and US index futures fell. Volatility ruled the roost in early afternoon trade as the key benchmark indices recovered from lower level, soon after hitting fresh intraday lows.

The market surged to a fresh 32-month high in afternoon trade after the Reserve Bank of India (RBI), at a mid-term monetary policy review, signaled that it may be nearing a pause in its current tightening cycle. The market came off the higher level later. The market once again slipped into the red later. The Sensex hit a fresh intraday low in late trade. The Sensex came off the lower level later.

NSE's volatility index, India VIX, a gauge of traders' perception of near-term risks in the market based on options prices, was down 2.99% at 18.85. The index had risen 4.46% to 19.43 on Wednesday, 15 September 2010. The index had risen 2.54% to 18.60 on Tuesday, 14 September 2010. The index had jumped 13.94% to 18.14 on Monday, 13 September 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 Reserve Bank of India (RBI) today, 16 September 2010, raised its repo rate, or benchmark lending rate, by a quarter point to 6%, at a mid-term monetary policy review. The central bank also hiked the reverse repo rate, or the rate at which it borrows funds, by half a point to 5%. Both these changes will take place with immediate effect.

Finance Minister Pranab Mukherjee said the Reserve Bank's move to hike policy rates is a step in the right direction. Inflationary pressures remain, he added. The Reserve Bank of India said that the growth rate indicates that the economic recovery is consolidating and the economy is rapidly converging to its trend rate of growth. Inflation remains the dominant concern in macroeconomic management, it added. The RBI said further rate moves will be based on current and expected macroeconomic conditions.

India's economic expansion will not be impacted by the central bank's decision to hike policy rates, Montek Singh Ahluwalia, deputy chairman of the Planning Commission said on Thursday.

Bond yields rose after the RBI hiked rates. The yield on the benchmark 10-year 2020 bond was hovering at 7.96%, higher than Wednesday's (15 September 2010) close of 7.95%. The yield on the second most traded, 8.13% 2022 bond was hovering at 8.10%, higher than Wednesday's close of 8.08%.

The central bank said growth prospects in agriculture have clearly been boosted by the monsoon, which, by virtue of substantial replenishment of reservoirs and ground water, will also contribute to a good rabi harvest. Virtually all leading indicators of service sector activity point to sustained growth, it said.

With regard to inflation, the central bank said the inflation rates have reached a plateau. However, the inflation rate is likely to remain at unacceptably high level for some months, it added. While prices of food articles, which according to the new series, rose by over 14% in August 2010, are still contributing to the pressure, about two-thirds of the August inflation can be attributed to items other than food articles and products. Notwithstanding slight moderation in August 2010, the headline inflation remains significantly above the trend of 5% to 5.5% in the 2000s, the RBi said in a statement. There is, therefore, need for continued policy response to contain inflation and anchor inflationary expectation, it said.

Another aspect of the concern with inflation is its implications for real interest rates. The policy actions taken over the past three quarters by the central bank have been partly motivated by the need to end the prevalence of negative real interest rates. This was sought to be accomplished by a combination of increasing policy rates in a non-disruptive manner and declining inflation rates. Both factors are at work, but the process is still incomplete, the central bank said.

One important consequence of negative real rates is that banks have seen a deceleration of deposit growth, as savers look for higher returns elsewhere. If bank credit is not to become a constraint to growth, real rates need to move in the direction of encouraging bank deposits, the central bank said.

As regards government finances, the fiscal deficit appears to be conforming to the estimates made in the Union Budget for 2010-11. Higher than expected realisations on 3G and broadband wireless access (BWA) auctions combined with buoyant tax revenues have virtually eliminated the risk of the fiscal deficit overshooting the targeted 5.5%, even after the supplementary demand for grants is taken into account. This will help stabilise market expectations of liquidity and interest rate movements, the RBI said.

Liquidity has been a significant factor in monetary policy considerations in recent months. The lead-up to the July 2010 policy review saw the liquidity situation transit from a large surplus to a mainly deficit one, making the repo rate the operative policy rate. Consequent on this transition, the transmission from policy rates to market rates has strengthened, with 40 banks raising their deposit rates and 26 raising their lending rates. These circumstances are expected to prevail, maintaining the repo rate as the effective policy rate and sustaining the strength of the transmission mechanism, the RBI said.

On the external front, the continuing sluggishness of the global economy constrains export growth while the strong domestic recovery has increased demand for imports. As a result, the trade deficit, and with it the current account deficit, are widening. In its July 2010 policy review, the Reserve Bank had highlighted the risks associated with a widening current account deficit in the face of increasingly volatile capital inflows.

The apparent stabilisation in advanced economies visible over the past few weeks appears to have improved global investor sentiment, resulting in a steady increase in capital inflows into emerging markets, including India. If this trend continues, the risks on the external front will clearly abate despite exports remaining sluggish, the RBI said.

The RBI said its overall assessment is that the economic growth remains steady. However, the volatility in growth in industrial production over the past two months raises some doubts about how effectively the index reflects the underlying momentum in the industrial sector, the central bank said. Inflation appears to have stopped accelerating though the rate may remain high for some months, the RBI said. The early signs of a downturn in non-food manufacturing inflation suggest that recent monetary actions are having an impact on both inflationary expectations and demand in a non-disruptive way.

If the global situation stabilises, it will help contain volatility in capital flows, the central bank said. But the flip side of that will be possible firming of commodity prices and consequent inflationary pressures, according to the central bank

The Reserve Bank's rate and liquidity actions since October 2009 have been driven by two considerations -- normalisation of the monetary policy stance as the crisis abated and inflation management. The Reserve Bank of India believes that the tightening that has been carried out over this period has taken the monetary situation close to normal. Consequently, the role of normalisation as a motivation for further actions is likely to be less important. Current and expected macroeconomic conditions will be the more important considerations going forward. The Reserve Bank of India will continue to monitor these conditions, particularly the price situation, and take further action as warranted, the RBI said in a statement.

The latest data showed the food price index rose 15.1% while the fuel price index climbed 11.48% in the year to 4 September 2010, under a new series with different base year, components and weightings. The primary articles index was up 16.22%.

Exports grew 22.5% to $16.64 billion in August 2010 over August 2009, while imports rose 32.3% to $29.7 billion. As a result, trade deficit, or the difference between exports and imports, widened to $13.5 billion. During the April-August 2010 period, exports posted a growth rate of 28.6% to $85.27 billion over the previous year, while total imports grew by 33.1% to $141.89 billion, according to initial estimates released by the Ministry of Commerce and Industry.

The Prime Minister Manmohan Singh on 15 September 2010 projected a 9% to 10% growth rate in the medium term and said that efforts should be made to remove deficiencies to enhance productivity across all sectors of the economy. He added that the country's economic performance in the last few years has been impressive and is poised to move to a trajectory of sustained high economic growth, which is essential for fighting persistent poverty, hunger and disease that still afflicts millions of people.

Coming back to stocks, foreign institutional investors (FIIs) are in a buying spree in India. Foreign institutional investors (FIIs) bought shares worth a net Rs 2360.10 crore on Wednesday, 15 September 2010, on the top of an inflow of Rs 1723.30 crore on Tuesday, 14 September 2010.

FII inflow in September 2010 totaled Rs 11299.20 crore (till 15 September 2010). FIIs had bought equities worth Rs 11687.50 crore in August 2010. FII inflow in the calendar year 2010 totaled Rs 70680.90 crore (till 15 September 2010).

Buoyed by earnings growth in banks, financial services and manufacturing firms, Corporate India has paid 15% higher advance tax in the June-September 2010 quarter over the year-ago period. Companies pay advance taxes in four installments throughout the year based on the business they are doing and hence, the advance tax payments made are seen as a barometer of the companies' performance.

The government's indirect tax collections grew 45% to Rs 27,947 crore in August 2010 over August 2009. For the first five months from April 2010 to August 2010 of the current fiscal, the centre's indirect tax collections grew nearly 46% to Rs 1,24,170 crore over the previous year. The centre has targeted indirect tax collections of Rs 3.15 lakh crore for the fiscal year ending March 2011.

European stocks declined after a report showed UK retail sales unexpectedly fell in August 2010, the first decline since January 2010. The key benchmark indices in France, UK and Germany were down by between 0.05% to 0.38%.

British retail sales saw a 0.5% monthly decline in August, government data showed Thursday. Sales were up 0.4% compared to the same month last year. Economists had forecast a 0.3% monthly rise and a 2% year-on-year increase.

Spain on Thursday sold 4 billion euros ($5.2 billion) of 10- and 30-year bonds, while borrowing costs fell, news reports said.

Asian stocks fell on Thursday as resource sector stocks declined in the wake of lower commodity prices. The key benchmark indices in Indonesia, Hong Kong, South Korea, Singapore, Taiwan and China were down by between 0.07% to 1.89%.

Japanese stocks ended slightly lower amid doubts over whether the weakness in the yen will continue. The Nikkei 225 average ended 0.07% lower. Japanese monetary authorities are estimated to have spent as much as 1 trillion yen, or about $11.6 billion, on Wednesday in a bid to weaken the yen, the Yomiuri Shimbun reported on its Web site. Other reports put the total at as much as twice that.

Trading in US index futures indicate that the Dow could slide 21 points at the opening bell on Thursday, 16 September 2010

Closer home, India's industry began the second quarter on a strong footing, clocking 13.8% growth in July 2010, data late last week showed. The growth rate, the highest in two months, exceeded market expectations. The growth was driven by a strong showing by the manufacturing sector, particularly the capital goods segment.

Meanwhile, the government revised downwards the industrial production growth for June 2010 to 5.76% from earlier 7.1%

Good monsoon rains this season will raise farm output, boost rural incomes and lower food inflation. 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 BSE 30-share Sensex was down 84.62 points or 0.43% to 19,417.49. The Sensex rose 134.55 points at the day's high of 19,636.66 in afternoon trade, its highest level since 18 January 2008. The index fell 118.65 points at the day's low of 19,383.46 in late trade.

The S&P CNX Nifty was down 32.25 points or 0.55% to 5,828.70. Nifty struck a high of 5,901.65 in afternoon trade, its highest level since 18 January 2008.

The market breadth, indicating the health of the market was weak. On BSE, 1906 shares declined while 1076 shares rose. A total of 104 shares remained unchanged. The breadth was positive in early trade.

From the 30-share Sensex pack, 19 stocks declined while the rest gained.

The BSE Mid-Cap index fell 0.97% and underperformed the Sensex. The BSE Small-Cap index fell 0.41% and outperformed the Sensex.

BSE Realty index (up 1.22%), banking sector index Bankex (up 0.59%), Capital Goods index (up 0.37%), FMCG index (up 0.23%), Power index (down 0.39%), outperformed the Sensex.

BSE IT index (down 2.29%), Metal index (down 1.5 %), Oil & Gas index (down 1%), Consumer Durables index (down 0.73%), PSU index (down 0.59%), Healthcare index (down 0.45%) and Auto index (down 0.45%) underperformed the Sensex.

IT stocks fell on worries about slower economic recovery in US, the key market for Indian IT firms. India's second largest software services exporter by sales Infosys lost 2.7%, halting an eight-day rally, on profit booking. It was the top loser from the Sensex pack.

India's largest IT exporter by sales TCS slipped 2%, ending three-day winning streak. TCS announced before market hours on Wednesday, 15 September 2010, that it has entered into a significant multi-year agreement with SUPERVALU Inc, one of the largest grocery retailers in North America, for full services engagement.

India's third largest software services exporter Wipro declined 0.86%. Wipro recently appointed billionaire founder-chairman Azim Premji's oldest son Rishad Premji as chief strategy officer.

Metal and mining stocks declined after LMEX, a gauge of six metals traded on the London Metal Exchange, fell 0.37% on Wednesday, 15 September 2010.

JSW Steel, Hindustan Zinc, Tata Steel, Jindal Steel & Power, Sterlite Industries, Hindalco Industries, Sesa Goa and National Aluminum Company fell by between 0.29% to 3.23%.

Index heavyweight Reliance Industries (RIL) fell 0.95% to Rs 1000.90. The stock moved in a range of Rs 998.55 to Rs 1018. The stock had risen over 2% on Wednesday on reports the company paid 13% higher advance tax at Rs 1308 crore in Q2 September 2010, compared with Rs 1157 crore in Q2 September 2009.

Realty stocks rose in volatile trade after Reserve Bank of India (RBI) signalled that it may be nearing a pause in its current tightening cycle. India's largest real estate developer by sales DLF jumped 2.66% to Rs 349.70, off sharply from day's low of Rs 334.50.

Unitech, Sobha Developers, HDIL and Phoenix Mills rose by between 0.11% to 2.66%.

Banking stocks rose after Reserve Bank of India (RBI) signalled that it may be nearing a pause in its current tightening cycle. India's largest bank by net profit and branch network State Bank of India (SBI) advanced 1.29% to Rs 3,100.05 on reports it is in talks with the Reserve Bank of India to form a holding company to control its equity.

SBI has reportedly paid advance tax of Rs 1924 crore in Q2 September 2010, compared with Rs 1832 crore in Q2 September 2009.

India's largest private sector bank by net profit ICICI Bank rose 0.42% while India's second largest private sector bank by net profit HDFC Bank gained 0.78%, reversing initial losses.

Auto shares were mixed. India's top truck maker by sales Tata Motors 0.44% as the company's global vehicles sales rose 29% to 85,411 units in August 2010 over August 2009. The company unveiled the global sales data during market hours on Wednesday, 15 September 2010.

India's top small car maker by sales Maruti Suzuki India gained 1.25%, on reports the company is planning to roll out a multi utility vehicle at the start of 2012.

But, India's largest tractor and utility vehicles maker Mahindra & Mahindra (M&M) slipped 0.5%. Bajaj Auto and Hero Honda Motors fell by between 0.13% to 0.96%.

A recent Society of Indian Automobile Manufacturers data showed domestic automobile sales rose 25.24% to a record 12.63 lakh units in August 2010 in over August 2009, boosted by rising incomes, new models and lower borrowing costs. Exports climbed 28% to 191,033 units.

India's largest cellular services provider by sales Bharti Airtel shed 2.37% after the company added 2.03 million mobile subscribers in August 2010, its slowest pace of additions since October 2007 and compared with 2.6 million users added in July 2010. Bharti Airtel had a total of 141.3 million mobile users in India as at end-August 2010.

Shipping shares declined after the Baltic Dry Index, which tracks rates to ship dry commodities, slumped 3.40% in London on Wednesday, 15 September 2010. Shipping Corporation of India, Essar Shipping Ports & Logistics, Great Eastern Shipping Company and Mercator Lines fell by between 0.33% to 2.66%.

Cals Refineries clocked the highest volume of 5.99 crore shares on BSE. FCS Software (1.93 crore shares), Karuturi Global Solutions (1.79 crore shares), Shree Ashtavinayak Cine Vision (1.59 crore shares) and Suzlon Energy (1.02 crore shares) were the other volume toppers in that order.

State Bank of India clocked highest turnover of Rs 313.69 crore on BSE. Midfield Industries (Rs 135.93 crore), Tata Steel (Rs 121.87 crore), ICICI Bank (Rs 119.42 crore) and Atlanta (Rs 103.26 crore) were the other turnover toppers in that order.