Realty shares slide as RBI tightens norms on housing loans

The key benchmark indices were little changed at close after undergoing intraday volatility. With the Reserve Bank of India (RBI) today, 2 November 2010, signaling a pause in its policy tightening drive that began in October 2009, the focus has now shifted to the two-day US Federal Reserve policy meeting that concludes on Wednesday, 3 November 2010. The BSE 30-share Sensex was down 9.94 points or 0.05%, off close to 70 points from the day's high and up close to 65 points from the day's low. European markets and US index futures were trading firm and most Asian stocks edged higher.



The market breadth was negative in contrast with a positive breadth earlier in the day. Index heavyweight Reliance Industries (RIL) declined. Realty stocks fell after the Reserve Bank of India tightened provisioning norms for home loans. Auto stocks, too, edged lower in volatile trade. Software and banking stocks saw mixed trend.

Stock prices moved in narrow range after seeing wild swing in early afternoon trade immediately after the Reserve Bank of India's decision at 11:30 IST to raise key policy rates at a quarterly policy review today, 2 November 2010. The market hit a fresh intraday high in afternoon trade. The market slipped to fresh day's low only to recoup losses in volatile mid-afternoon trade. Volatility continued in the last one hour of trade as the Sensex swung between gains and losses.

NSE's volatility index, India VIX, a gauge of traders' perception of near-term risks in the market based on options prices, was up 1.58% at 21.25. The index had risen 0.77% to 20.92 on Monday, 1 November 2010. The index had risen 1.17% to settle at 20.76 on Friday, 29 October 2010. The index had lost 2.38% to 20.52 on Thursday, 28 October 2010, a day after it had risen 2.29% to 21.02 on Wednesday, 27 October 2010. The index had lost 3.79% to 20.55 on Tuesday, 26 October 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 RBI at its second quarterly monetary policy review today, 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%. Speaking at a post-policy release press conference on Tuesday, the 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, Subbarao said in a statement. "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 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.

The RBI, meanwhile, tightened provisioning norms on home loans. 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%.

At present, the risk weights on residential housing loans with LTV ratio up to 75% is 50% for loans up to Rs 30 lakh and 75% for loans above that amount. In case the LTV ratio is more than 75%, the risk weight of all housing loans, irrespective of the amount of loan, is 100%. RBI has proposed increase in risk weight for residential housing loans of Rs 75 lakh and above, irrespective of the LTV ratio, to 125%.

The RBI said it has observed that some banks are following the practice of sanctioning housing loans at 'teaser rates', wherein the loans are offered at a comparatively lower rate of interest in the first few years, after which rates are reset at higher rates. This practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective. The RBI said it has been observed that many banks at the time of initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates. In view of the higher risk associated with such loans, RBI has proposed increase in standard asset provisioning by commercial banks for all such loans to 2%.

Bond yields declined after the RBI signaled ling a pause in its policy tightening drive that began in October 2009. The yield on the most traded 8.13% 2,022 bond was hovering at 8.01%, compared with Monday's (1 November 2010) close of 8.07%. The yield on the second most traded 7.99% 2017 bond was hovering at 7.90%, compared with Monday's (1 November 2010) close of 7.96%. The yield on the benchmark 7.8% 2020 was hovering at 7.97% from about 8.10% just before the policy announcement today, 2 November 2010, morning.

The central bank said even though a liquidity deficit is consistent with an anti-inflation stance, excessive deficiency can be disruptive both to financial markets and to credit growth in the banking system. To ensure that economic activity is not disrupted by liquidity constraints, the liquidity deficit needs to be contained within a reasonable limit, the RBI said. It may be recalled that the central bank had recently announced measures to to ease tight cash conditions in the banking system.

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.

European markets turned green in a volatile trading session on Tuesday ahead of a Federal Reserve meeting that is expected to ease monetary policy, and ahead of US elections. Key benchmark indices in France, Germany and UK rose between 0.42% and 0.93%.

Data released on Tuesday showed the rate of expansion in euro-zone manufacturing production accelerated for the first time in three month. At 54.6 in October, the Markit final euro-zone manufacturing purchasing managers' index was above its earlier flash estimate of 54.1 and also up on the average for the current 13-month period of improvement. It was also up from September's eight-month low of 53.7.

Asian markets ended broadly higher Tuesday as investors awaited details of an additional monetary-easing program widely expected from the US Federal Reserve. The key benchmark indices in Singapore, Japan, Hong Kong and South Korea rose between 0.06% to 0.41%. The key benchmark indices in Indonesia, China and Taiwan were down 0.28% and 0.54%.

US stocks squeaked out a slim gain Monday amid jitters ahead of US midterm elections and expected moves from the Federal Reserve. The Dow Jones Industrial Average rose 6.13 points, or 0.06%, to 11124.62, reversing an earlier triple-digit climb. The Nasdaq Composite closed down 2.57 points, or 0.10% to 2504.84. The Standard & Poor's 500-share index edged up 1.12 points, or 0.09% to 1184.38.

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. Economists expect the Federal Reserve to buy between $500 billion and $750 billion of government bonds and say the impact of such purchases already is baked into markets, according to a survey released Monday, 1 November 2010. A survey conducted by Blue Chip Financial Forecasts of leading economists showed 47.9% expect the central bank to buy between $500 billion and $750 billion, 29.2% see it purchasing between $750 billion to $1 trillion, 14.6% see it purchasing less than $500 billion and 8.3% see it purchasing more than $1 trillion.

Trading in US index futures indicated that the Dow could gain 29 points at the opening bell on Tuesday, 2 November 2010.

Back home, Q2 September 2010 corporate results announced so far have been encouraging. The combined net profit of a total of 1665 firms surged 40.5% to Rs 78137 crore on 18.40% growth in sales to Rs 554961 crore in Q2 September 2010 over Q2 September 2009.

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

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.

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.

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. Shares of Coal India will debut on the secondary equity markets on Thursday, 4 November 2010.

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. The Brazilian government recently 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%.

Foreign funds have made heavy purchases of Indian stocks this year. Net equity inflows in 2010 now stands at a record $26.25 billion, above last year's $17.45 billion.

The BSE 30-share Sensex was down 9.94 points or 0.05% to 20,345.69. The Sensex rose 62.72 points at the day's high of 20,418.35 in afternoon trade. The index lost 73.90 points at the day's low of 20,281.73 in mid-afternoon trade.

The S&P CNX Nifty was up 1.45 points or 0.02% to 6,119.

The market breadth, indicating the health, was negative, compared with positive breadth until mid-morning trade. On BSE, 1623 shares declined compared with 1394 shares that advanced. A total of 84 shares remained unchanged.

Among the 30-share Sensex pack, 17 declined while the rest gained.

The total turnover on the BSE amounted to Rs 4856 crore higher than Rs 2022.05 crore on Monday, 1 November 2010.

The BSE Mid-Cap index rose 0.45% the BSE Small-Cap index rose 0.09%. Both these indices outperformed the Sensex.

Most of the sectoral indices on BSE rose. The BSE Consumer Durables index (up 1.64%), Capital Goods index (up 1.42%), IT index (up 0.62%), FMCG index (up 0.49%), PSU index (up 0.4%), Bankex (up 0.22%), Power index (up 0.19%), Healthcare index (up 0.07%) outperformed the Sensex.

Realty index (down 2.58%), Oil & Gas index (down 0.8%), Auto index (down 0.53%) and Metal index (down 0.07%) underperformed the Sensex.

Index heavyweight Reliance Industries (RIL) fell 1.72% to Rs 1074.35, off day's high of Rs 1096. As per reports, an empowered group of ministers headed by Finance Minister Pranab Mukherjee is likely to meet on 10 November 2010 to decide on allocating natural gas from fields like RIL's KG-D6 to six upcoming power plants.

RIL on Saturday, 30 October 2010 said its net profit rose 27.80% to Rs 4923.00 crore on 22.69% rise in net sales to Rs 57479.00 crore in Q2 September 2010 over Q2 September 2009. Its gross refining margin (GRM) for quarter was at US$7.9 per barrel as against US$ 6 per barrel in the corresponding period of the previous year.

North India's largest cement firm by sales ACC jumped 4.2% to Rs 1056.95 after striking a 52-week high of Rs 1062.80 in intra-day trade today. ACC reported 13.6% rise in cement dispatches to 1.92 million tonne in October 2010 over October 2009. It was the top gainer from the Sensex pack.

UltraTech Cement rose 1.67% on reports cement dispatches grew 21.3% year-on-year for October 2010.

Ambuja Cements surged 3.71% after logging 19.7% rise in cements dispatches to 1.75 million tonne in October 2010 over October 2009.

India's largest engineering & construction company by sales Larsen & Toubro surged 2.53% to Rs 2133.25 after striking a 52-week high of Rs 2138. The stock extended two-day 3.85% gain on follow-up buying.

Among other capital goods stocks, SKF India, Praj Industries and ABB rose by between 0.1% to 2.25%.

Software stocks saw mixed trend. India's second largest software services exporter by sales Infosys rose 0.83% and India's third largest software services exporter by sales Wipro gained 2.49%. India's largest software services exporter by sales TCS slipped 0.48%.

Realty stocks dropped after the Reserve Bank of India tightened provisioning norms on housing loans by banks. India's top realty developer by sales DLF lost 3.28%. It was the top loser from the Sensex pack.

Among other realty shares, Indiabulls Real Estate, Ackruti City, Unitech, Orbit Corporation, Parsvnath Developers and Omaxe fell by between 0.36% to 5.03%.

Auto stocks fell after RBI's rate hike. India's biggest commercial vehicles maker by sales Tata Motors slipped 1.41%. The company unveils its Q2 September 2010 results on 9 November 2010. Its total sales rose 21.26% to 64,757 units during October 2010 compared to 53,404 units in the same month last year.

India's top small car maker by sales Maruti Suzuki India slipped 0.8%, extending Monday's over 2% slide. The company's total sales rose 39.2% to 1.18 lakh vehicles in October 2010 over October 2009.

India's largest tractor maker by sales Mahindra & Mahindra lost 1.14%, reversing Monday's over 4% surge. The company's auto sales rose 34% to 34,495 units in October 2010 as against 25,670 units during October 2009.

Bajaj Auto rose 1.07% after reporting 32% surge in total sales to a 3.7 lakh units in October 2010 over October 2009. The company said it clocked a record motorcycle and commercial vehicle sales in the recently concluded month.

India's largest bike maker by sales Hero Honda Motors rose 0.65%, reversing Monday's over 1% fall. It reported its highest ever monthly sales at 5,05,553 units in October 2010, registering a jump of 42.75% over the same month last year.

Banking stocks were volatile after RBI's rate hike. India's largest bank by net profit and branch network State Bank of India rose 0.19% to Rs 3202, off day's low of Rs 3175.50. The bank raised its Base Rate by 10 basis points to 7.60% per annum (pa) effective 21 October 2010.

India's second largest private sector bank by net profit HDFC Bank was almost unchanged at Rs 2348. The bank's net profit rose 32.68% to Rs 912.14 crore on 14.37% rise in total income to Rs 5770.70 crore in Q2 September 2010 over Q2 September 2009. The private sector bank announced the results after trading hours on 19 October 2010.

India's largest private sector bank by net profit ICICI Bank staged a comeback from day's low of Rs 1208.05 in late trade to settle unchanged at Rs 1230.50. The stock had jumped 12.90% in the past two trading sessions after the bank reported a 21.87% rise in consolidated net profit to Rs 1394.94 crore on 0.91% increase in total income to Rs 14595.85 crore in Q2 September 2010 over Q2 September 2009. The result was declared during market hours on Friday, 29 October 2010.

Consumer durables stocks rose on expectations of pick up in sales in the ongoing festive season. Gitanjali Gems, Videocon Industries, Titan Industries, Blue Star and Rajesh Exports rose by between 0.04% to 12.45%.

Mortgage lenders fell after the Reserve Bank of India tightened provisions for home loans. LIC Housing Finance, Dewan Housing Finance Corporation and HDFC were down by 0.93% to 2.47%.

Cals Refineries clocked the highest volume of 1.82 crore shares on BSE. Shree Ashtavinayak Cine Vision (1.22 crore shares), BS Transcomm (1.14 crore shares), Alok Industries (1.14 crore shares) and Indosolar (58.27 lakh shares) were the other volume toppers in that order.

BS Transcomm clocked the highest turnover of Rs 537.25 crore on BSE. State Bank of India (Rs 120.68 crore), Wockhardt (Rs 116.87 crore), ICICI Bank (Rs 101.26 crore) and Reliance Media Works (Rs 98.07 crore) were the other turnover toppers in that order.