Market set for upbeat start on firm Asian stocks

The market is geared for a strong start on a rally in Asian stocks triggered by strong Chinese manufacturing data. Trading of S&P CNX Nifty futures on the Singapore stock exchange indicate that the Nifty could advance 60 points at the opening bell. Cement, auto and steel companies will be in focus as firms in these sector announce their sales figures for the month of October 2010. Quarterly earnings from index heavyweight Reliance Industries unveiled on 30 October 2010 were in line with market expectations.



The focus of the market is currently on the second quarter September 2010 results. The results announced so far have been encouraging. The combined net profit of a total of 1455 firms surged 43.2% to Rs 77013 crore on 18.4% growth in sales to Rs 537643 crore in Q2 September 2010 over Q2 September 2009.

The Reserve Bank of India (RBI)'s quarterly monetary policy review on Tuesday, 2 November 2010 will be closely watched. The RBI is widely expected to raise its key lending rate by 25 basis points, the sixth such hike since March 2010, when it meets to review policy on 2 November 2010, as it looks to achieve its end-March 2011 projection of headline inflation at 6%. Rate hikes by the RBI have a direct impact on interest rates offered by banks on loans to Indian companies.

The RBI has hiked the key rates at which it lends to (repo) and borrows from banks (reverse repo) five times this year as the ripples caused by the global economic slowdown died out and headline inflation numbers kept increasing.

Asian shares edged higher on Monday on strong manufacturing data from China. The key benchmark indices in China, Hong Kong, Singapore, Taiwan, South Korea, and Indonesia rose between 0.36% and 1.79%. But, Japan's Nikkei 225 index fell 0.18% as the yen's strength weighed on exporters.

US stocks ended mixed on Friday, 29 October 2010, in light trading as investors bid their time before the parliamentary elections on Tuesday and the meeting of the Federal Reserve. The Dow Jones Industrial Average closed up 4.54 points, or 0.04%, to 11118.49. The Nasdaq Composite rose 0.04 point to 2507.41. The Standard & Poor's 500 stock index edged down 0.52, or 0.04%, to 1183.26.

The US gross domestic product grew at an annual rate of 2% in the third quarter, up from 1.7% the previous quarter. Consumer spending increased 2.6% in the third quarter, accelerating from a 2.2% rise in the second.

The US Federal Reserve is likely to renew its asset purchasing policies, known as quantitative easing, following a Federal Open Market Committee policy-setting meeting that ends on Wednesday, 3 November 2010. Most leading economists expect the Fed to buy between $80 billion and $100 billion worth of assets each month in a new program to stimulate the economy.

Back home, foreign funds bought equities worth a net Rs 735.40 crore and domestic institutional investors bought shares worth Rs 344.40 crore on Friday, 29 October 2010, as per provisional data from the stock exchanges.

The Reserve Bank of India (RBI) on 29 October 2010, unveiled special liquidity measures to tide banks over the temporary cash crunch. The RBI said banks can avail funds under the special measures up to an additional 1% of their deposits. The RBI said it will conduct two liquidity adjustment facility (LAF) auctions on 29 October 2010 and 1 November 2010 respectively. The bank also conducted a special 2-day repo auction on Saturday, 30 October 2010. The RBI said that the measures were temporary and were being taken to provide liquidity comfort arising out of frictional liquidity pressure.

The annual food inflation eased in mid-October 2010 as vegetable prices fell. The food price index in the year to 16 October 2010 rose 13.75%, compared with 15.53% rise in the previous week. The fuel price index for the same week rose 11.25% against an annual rise of 11.14% in the previous week. The primary articles price index was up 16.62%, compared with an annual rise of 18.05% a week earlier.

Reserve Bank of India deputy governor Subir Gokarn, last week, said high food prices is a structural problem and he warned rising prices would put upward pressure on inflation and interest rates. Finance Minister Pranab Mukherjee, last week, said 4-5 percent inflation is "ideal" for India's economy, but admitted achieving that level might be difficult.

The government has allowed duty-free import of rice and wheat and has released grains from its stocks to rein in food price rise

RBI governor D Subbarao, last week, said managing the exchange rate in the face of volatile flows contains a cost, and the challenge was to minimise that cost. Buying dollars adds liquidity to the banking system, which aggravates inflation. Sterilising resultant liquidity can push up interest rates, which in turn attracts further inflows, the Reserve Bank of India governor said.

Managing currency tensions will require a shared understanding on keeping exchange rates aligned to economic fundamentals, and an agreement that currency interventions should be resorted to not as an instrument of trade policy but only to manage disruptions to macroeconomic stability, Subbarao said. The Group of 20 advanced and emerging economies agreed recently to move towards market-determined exchange rates and to pursue the full range of policies needed to reduce excessive external imbalances.

The RBI governor said managing capital flows is not a problem that should be managed only by emerging market economies. In as much as lumpy and volatile flows are a spillover from policy choices of advanced economies, the burden of adjustment has to be shared, Subbarao said.

Finance Minister Pranab Mukherjee, last week, said the government has no plan to put any cap on flow of funds from foreign institutional investors (FIIs), which have pumped in nearly $25 billion so far this year. He said a sharp increase in inflow of funds from FIIs has provided cushion in controlling current account deficit. "I am confident with the flow of FIIs and foreign exchange availability, I will be able to contain current account deficit at around 3% of the GDP," Mukherjee said. The Finance Minister admitted that inflows of foreign funds have put pressure on the Indian currency.

He added that said steps to mop-up liquidity in India, as part of inflation-fighting measures, must not affect economic growth. He said the economy is on the path to regaining the growth momentum seen before the global economic slowdown. The Reserve Bank of India has taken steps to moderate demand to levels which India's economy can support in the light of high inflation, Mukherjee said.

India's economy is seen growing by 8.5% to 9.7% in the 2010/11 fiscal year and monetary tightening should ensure the pace of recovery is not hit, the finance ministry said in a report released on 26 October 2010. The report also said measures to temporarily ease liquidity were consistent with the Reserve Bank of India's (RBI) policy stance of containing inflation and anchoring inflationary expectations. "It has to be ensured that monetary tightening does not adversely affect the pace of recovery at this stage," the Finance Ministry wrote in the report.

The government may lift controls on diesel pricing in a phased manner, instead of in one go, to cushion any blow on the poor, the oil ministry said in a report on 26 October 2010. "It is proposed that increase in prices of diesel will be staggered over time to minimise the overall impact on the poor and the vulnerable," the report said. It also said the government may intervene in the pricing of petrol and diesel in case of a sharp rise or volatility in global crude oil prices.

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.

But, the liquidity in secondary equity markets in the immediate short term could rise as Coal India begins to refund excess subscriptions received towards its initial public offering. The IPO of Coal India IPO was subscribed more than 15 times.

Good Q2 results from frontline companies helped the market snap a three-day losing streak on Friday, 29 October 2010. The BSE 30-share Sensex was up 91.30 points or 0.46% to 20,032.34 and the S&P CNX Nifty was up 30 points or 0.50% to 6,017.70.

Meanwhile, flows pouring into emerging market funds slowed considerably in the fourth week of October 2010. EPFR Global-tracked emerging markets equity and bond funds took in $2.68 billion and $710 million, respectively, in the week ended 27 October 2010, around half the previous week's totals. Last week, global emerging markets equity funds took in $3.76 billion, topping the record of $3.74 billion set in the first week of October 2010, which had been the highest total since EPFR started compiling weekly flow data.

Brazil equity funds posted another solid week of inflows despite that market's recent efforts to control capital inflows via higher taxes, EPFR said. Last week, the Brazilian government raised the tax on foreign purchases of fixed income to 6% from 4%. It also raised the tax on margin deposits on futures markets to 6% from 0.38%.