Market may jump on Fed's stimulus plan; food inflation data eyed

The market may extend Wednesday (3 November 2010)'s gains on firm Asian stocks following the Fed's move to buy $600 billion in bonds to stimulate the economy. Trading of S&P CNX Nifty futures on the Singapore stock exchange indicate that the Nifty could gain 40 points at the opening bell.



Meanwhile, Coal India shares will be listed on bourses today. The government had fixed issue price at Rs 245. The issue had received strong response to its record $3.5 billion IPO.

In macro news, the government will unveil data on some wholesale price indices for the year through 23 October 2010 viz. the food price index, the primary articles index and the fuel price index at about 12:00 IST.

Asian stock markets rose Thursday as investors took heart from the Federal Reserve's plan to buy $600 billion in government bonds in an effort to inject life into the faltering U.S. economy.The key benchmark indices in China, Hong Kong, Indonesia, Japan, South Korea, Singapore and Taiwan rose by between 0.35% to 2.24%.

US markets edged higher in volatile trade on Wednesday, following the Fed's move to buy $600 billion in bonds to stimulate the economy. The aim is to drive interest rates lower in an effort to spark spending and lending. The U.S. central bank said it would buy about $75 billion in longer-term Treasury bonds per month through the end of June 2011 and could adjust purchases depending on the recovery.

The Fed's announcement came a day after American voters frustrated by persistent unemployment and the limp housing market handed control of the House to Republicans to Republicans and gave the party a bigger voice in the Senate. The split will probably make it harder for President Barack Obama to enact any major economic initiatives and could put more pressure on the Fed to get the wobbly economy back on firmer footing.

The Bank of Japan, which meets on Thursday and Friday, is also poised to launch a new round of bond buying. The European Central Bank and Bank of England also meet this week, but are expected to leave policy on hold.

Central banks in the United States and the euro zone should only return monetary policy to more normal settings in 2012 due to weak economic growth, the OECD said on Wednesday.

Back home, the Q2 September 2010 corporate results have been encouraging. The combined net profit of a total of 1854 firms surged 38.8% to Rs 80477 crore on 18.5% growth in sales to Rs 582799 crore in Q2 September 2010 over Q2 September 2009.

India's services sector expanded last month at a faster rate than in September 2010, bringing an end to a 3-month decline in the key business activity index, a survey showed on Wednesday, 3 November 2010. The seasonally adjusted HSBC Markit Business Activity Index, based on a survey of 400 firms, rose to 56.2 in October from 55.6 in September, remaining above the 50 mark that divides growth from contraction for the 18th consecutive month.

The manufacturing sector expanded in October 2010 at a much faster pace than in September 2010, supported by strong output and a sharp rise in new business, a purchasing managers' index (PMI) showed on Monday, 1 November 2010. The HSBC Markit PMI, based on a survey of 500 Indian companies, rose to 57.2 in October 2010 from 55.1 in September 2010 and 57.2 in August 2010. New orders climbed for the 19th month in a row and at a faster rate than in September 2010.

The report said input prices for manufacturers increased substantially in October 2010 and at their fastest pace in five months, while output prices rose modestly. "Price pressures, however, are still too strong for comfort, possibly prompting the central bank to hike again before the end of the year," Frederic Neumann, co-head of Asian Economics Research at HSBC, said in a statement

The Reserve Bank of India (RBI) at its second quarterly monetary policy review on Tuesday, 2 November 2010, hiked its lending and borrowing rates by a quarter point each, as expected, to tackle inflationary pressures. The RBI raised its repurchase or repo rate (at which it lends money to bank) to 6.25%, while increasing the reverse repurchase or reverse repo rate to 5.25%. It left the cash reserve ratio (the amount of deposits that commercial banks are required to keep with the RBI) unchanged at 6%. RBI Governor D Subbarao said that some controls on debt flows will be maintained.

Based purely on current growth and inflation trends, the Reserve Bank of India (RBI) believes that the likelihood of further rate actions in the immediate future is relatively low, RBI governor D Subbarao said in a monetary policy statement on Tuesday. "However, in an uncertain world, we need to be prepared to respond appropriately to shocks that may emanate from either the global or domestic environment," he added.

The central bank said inflation is expected to moderate from the present elevated level, reflecting in parts, some easing of supply constraints and concerted policy action. The RBI said that under a new series of the wholesale price index, its projection now stands at 5.5% at end March 2011, which is equivalent to 6% under the old series. In July 2010, the RBI forecast that wholesale price index inflation was likely to ease to 6% by March 2011, under an old method of calculating price increases. The RBI also retained its gross domestic product forecast for the current financial year, ending in March 2011, at 8.5%

The central bank imposed stringent norms on housing loans by commercial banks such as increasing the risk weights, higher provisioning for teaser rate loans, among others. At present, there is no regulatory ceiling on the loan to value (LTV) ratio in respect of banks' housing loan exposures. In order to prevent excessive leveraging, RBI has proposed that the LTV ratio in respect of housing loans hereafter should not exceed 80%.

The RBI said it will continue to closely monitor both global and domestic macroeconomic conditions. "We will take action as warranted with a view to mitigating any potentially disruptive effects of lumpy and volatile capital flows and sharp movements in domestic liquidity conditions, consistent with the broad objectives of price and output stability", the policy statement said.

Demand side pressures in India have moderated due to the monetary actions that have been taken so far, Subbarao told analysts in a conference call on Wednesday, 3 November 2010. RBI deputy governor Subir Gokarn said rate actions taken so far by the Reserve Bank of India are consistent with achieving non-negative real interest rates by March 2011.

The RBI on Sunday, 31 October 2010, said it was extending the special liquidity measures unveiled last week up to 4 November 2010. The RBI also allowed lenders to temporarily lower holdings of debt below regulatory requirements to raise cash.

Foreign funds have made heavy purchases of Indian stocks this year. Net equity inflows in 2010 now stands at a record $26.46 billion, above last year's $17.45 billion.

While global liquidity remains ample, a section of the market is worried that a strong equity issuance pipeline over the next six months will soak liquidity from the secondary equity markets. Indian companies are estimated to raise about Rs 80000 crore from equity and debt issue over the next three to six months. State-run Power Grid Corp, Steel Authority of India and Indian Oil Corp are some of the companies that are planning large share sales in coming months.