RBI's aggressive rate hike spooks market

Key benchmark indices tumbled after a higher-than-expected hike of 50 basis points by the Reserve Bank of India (RBI) in its key lending rate at a policy review today, 26 July 2011. Interest rate sensitive automobile, real estate and banking stocks led the decline. The BSE Sensex fell 353.07 points or 1.87%, off close to 426.38 points from the day's high and up close to 36.59 points from the day's low. The Reserve Bank of India (RBI) raised the repo rate by 50 basis points (bps) to 8% at its first quarter review of monetary policy 2011-12 announced today, 26 July 2011, which was steeper than market expectations of 25 bps hike.

In an instant reaction to the RBI's policy move, private sector bank Yes Bank today, 26 July 2011, raised its base rate by 50 basis points to 10.25% with immediate effect. The bank also increased its prime lending rate by 50 bps with immediate effect. The increase in base rate and PLR will enable the bank to fully absorb the increased costs on account of rising interest rates, Yes Bank said in a statement. The rate hike will also serve the purpose of effective and immediate transmission of monetary policy objectives of RBI, Yes Bank said.

Maruti Suzuki dropped in choppy trade after the company said at the time of announcing Q1 June 2011 results today that the passenger car market was sluggish in Q1 June 2011, mainly due to a sharp increase in fuel prices and higher interest rates. Bharat Heavy Electricals dropped as revenue growth in Q1 June 2011 fell short of market expectations. Bhel's disappointing revenue growth weighed on many other capital goods shares. FMCG stocks also declined. The market breadth, indicating the overall health of the market, was weak. All the sectoral indices on BSE declined.

The market pared gains after hitting 2-1/2-week high at the onset of the trading session. The market slipped into the red later. The Sensex swung between positive and negative terrain near the flat line in morning trade. A steeper-than-expected hike of 50 basis points by the Reserve Bank of India (RBI) in its key lending rate spooked the market in mid-morning trade. The market extended losses to hit fresh intraday low in early afternoon trade. Weakness continued in afternoon trade. The market remained weak in mid-afternoon trade. The market extended losses to hit fresh intraday low in late trade.

The BSE Sensex fell 353.07 points or 1.87% to settle at 18,518.22, its lowest closing level since 21 July 2011. The index slumped 389.66 points at the day's low of 18,481.63 in late trade. The Sensex rose 73.31 points at the day's high of 18,944.60 in early trade, its highest level since 8 July 2011.

The S&P CNX Nifty fell 105.45 points or 1.86% to 5,574.85, its lowest closing level since 21 July 2011. The Nifty hit a low of 5,560.15 in intraday trade. The Nifty hit high of 5,702.25 in intraday trade, its highest level since 8 July 2011.

The BSE Mid-Cap index fell 1.01% and the BSE Small-Cap index fell 0.80%. Both these indices outperformed the Sensex.

The market breadth, indicating the overall health of the market, was weak. On BSE, 1,887 shares declined and 1,000 shares advanced. A total of 117 shares remained unchanged. The breadth was positive in early trade, before the announcement of RBI's monetary policy.

BSE clocked a turnover of Rs 2871 crore compared with a turnover of Rs 2899.08 on Monday, 25 July 2011.

IT giant TCS rose 0.39% to Rs 1143.80 and was the only gainer from the Sensex pack.

Index heavyweight Reliance Industries (RIL) fell 1.25% to Rs 871.15 as the company's operating profit margin witnessed a steep fall in Q1 June 2011. RIL's operating profit margin (OPM) declined sharply to 12.25% in Q1 June 2011 from 16.04% in Q1 June 2010 as weak performance from the oil & gas and petrochemicals businesses offset strong performance from the refining segment.

RIL's net profit rose 16.69% to Rs 5661 crore on 39.1% increase in net sales to Rs 81018 crore in Q1 June 2011 over Q1 June 2010. The growth in both net profit and net sales topped market expectations. RIL was seen reporting 15.44% growth in net profit to Rs 5600.35 crore on 28.7% growth in net sales to Rs 74951.47 crore in Q1 June 2011 over Q1 June 2010, as per average estimate of 10 brokerages. The result hit the market after trading hours on Monday, 25 July 2011.

RIL's gross refining margin (GRM) surged to $10.3 a barrel from $7.3 a barrel in Q1 June 2010. Gas production from RIL's KG-D6 field off the east coast declined 18% to 156.2 BCF in Q1 June 2011 over Q1 June 2010. Production of gas condensate from the filed jumped 81.6% to 0.21 million barrels in Q1 June 2011 over Q1 June 2010. The company said gas sales have been prioritized as per government's directive with effect from 9 May 2011.

Commenting on the first quarter results, RIL chairman and managing director Mukesh Ambani said, "Reliance Industries continues to deliver strong financial and operating results. The growth in earnings was driven by strong refining margins and sustained performance in the petrochemicals business. Our cash flows give us the unparalleled opportunity to allocate capital to higher-margin resource plays in leading markets around the world. We remain committed towards investing in India and have commenced the investment programme in the petrochemicals business".

The RIL stock had risen nearly 1% on Monday, 25 July 2011, after the government, last week, approved RIL's proposed $7.2 billion asset sale to BP PLC. RIL and BP have been waiting for approval from the government since February 2011 when RIL agreed to sell a 30% stake to BP in 23 oil and gas blocks for $7.2 billion plus another $1.8 billion linked to exploration success. The deal includes the D6 block in the Krishna-Godavari basin, India's richest gas find so far, and RIL has already received $2 billion from BP.

RIL is expected to gain from BP's deep-water drilling expertise to increase gas production. Several technical and geological issues have resulted in gas output from RIL's KG-D6 block falling below 50 million metric standard cubic meters per day from 60 million metric standard cubic meters per day last year. As per the agreement, BP and RIL will also establish an equally owned joint venture for the sourcing and marketing of natural gas in India. That venture doesn't require government approval.

Asian Paints rose 0.78% to Rs 3139.95 after the company announced during market hours today that consolidated net profit rose 18.66% to Rs 263.66 crore on 23.92% rise in total income to Rs 2290.90 crore in Q1 June 2011 over Q1 June 2010.

Commenting on the first quarter results Asian Paints Managing Director and CEO P M Murty said, "The company witnessed good growth during the quarter driven by favorable demand for decorative coatings across the country. However, demand in June has not been robust. Demand conditions for international and industrial businesses continue to be challenging. Input cost rose sharply necessitating price increases aggregating to 8% till now. The impact of these increases on demand will need to be gauged."

JSW Steel rose 0.13% to Rs 870.35. The company announced during market hours today that consolidated net profit jumped 64.25% to Rs 485.16 crore on 53.46% rise in total income to Rs 7455.67 crore in Q1 June 2011 over Q1 June 2010.

FMCG stocks fell on profit taking. Marico, ITC, Britannia Industries, Hindustan Unilever, Dabur India, United Breweries, Colgate-Palmolive (India), Godrej Consumer Products, United Spirits and Tata Global Beverages fell down 0.47% to 3.13%.

State-run power equipment maker Bharat Heavy Electricals (Bhel) fell 4.46% to Rs 1908.80 as revenue growth in Q1 June 2011 fell short of market expectations. The company's net profit rose 22.15% to Rs 815.51 crore on 9.97% increase in net sales to Rs 7125.68 crore in Q1 June 2011 over Q1 June 2010. The net profit was boosted by a steep 52.12% jump in other income to Rs 248.65 crore in Q1 June 2011 over Q1 June 2010. The result was announced during trading hours today, 26 July 2011.

Analysts were expecting a much stronger revenue growth in Q1 June 2011 from Bhel on expectations of a strong execution of the large order book of the power equipment major. The company's outstanding order book was Rs 159600 crore as on 30 June 2011.

Among other capital goods stocks, Larsen & Toubro, Crompton Greaves, BEML, Suzlon Energy, Punj Lloyd, Thermax, BGR Energy, Usha Martin, Alstom Projects, Areva T&D, Reliance Industrial Infrastructure, ABB, Gammon India, Havells India, Praj Industries, Lakshmi Machine Works, Siemens and Bharat Electronics fell by 0.32% to 3.84%.

Realty stocks fell on worries higher interest rates could dent demand for residential and commercial properties. Purchases of both residential and commercial property are largely driven by finance. Indiabulls Real Estate, Sobha Developers, DLF, Unitech, Anant Raj Industries, HDIL, DB Realty, Orbit Corporation, Sunteck Realty, Mahindra Lifespace Developers, Ackruti City, Parsvnath Developers, Godrej Properties, Phoenix Mills and Peninsula Land fell by 0.19% to 4.79%.

Bank shares dropped across the board after the Reserve Bank of India revised downwards non-food credit growth forecast for the year ending March 2012 to 18% from 19% earlier at its first quarter review of monetary policy 2011-12 announced today, 26 July 2011. India's largest private sector bank by net profit ICICI Bank fell 3.13% to Rs 1040.60. India's largest commercial bank by branch network State Bank of India (SBI) declined 2.86% to Rs 2441.80. The bank's Chairman Pratip Chaudhari was quoted by the media as saying that the bank sees a need to raise short-term deposit rates. India's second largest private sector bank by net profit HDFC Bank shed 1.44% to Rs 497.85.

Yes Bank dropped 3.98% to Rs 319.40. In an instant reaction to the RBI's policy move, private sector bank Yes Bank today, 26 July 2011, raised its base rate by 50 basis points to 10.25% with immediate effect. The bank also increased its prime lending rate by 50 bps with immediate effect. The increase in base rate and PLR will enable the bank to fully absorb the increased costs on account of rising interest rates, Yes Bank said in a statement. The rate hike will also serve the purpose of effective and immediate transmission of monetary policy objectives of RBI, Yes Bank said.

Among other bank shares, Kotak Mahindra Bank, Bank of India, IDBI Bank, IndusInd Bank, Punjab National Bank, Canara Bank, Bank of Baroda, Federal Bank, Axis Bank and Union Bank of India declined by 0.31% to 4.26%.

Auto stocks skidded as higher interest rates could crimp sales of automobiles. Purchases of automobiles, including that of cars, utility vehicles and commercial vehicles are substantially driven by financing. India's largest truck maker by sales Tata Motors fell 3.06% to Rs 973.15, with the stock snapping three-day gains.

Utility vehicles and tractors major Mahindra & Mahindra (M&M) fell 4.20% to Rs 716.70, with the stock snapping two-day gains. Last week, Ssangyong Motor Company, the South Korean subsidiary of M&M, reported 43% growth in revenue to KRW 1349.2 billion in the first half of the calendar 2011 over the previous corresponding period. Ssangyong Motor's sales rose 53% to 55,873 vehicles in the first half of the calendar 2011 over in the first half of the calendar 2010. This is the highest level of sales volume achieved by the company in a half year period since 2007.

India's largest bike maker by sales Hero Honda Motors shed 0.33% to Rs 1818.25. India's second largest motorcycle maker by sales Bajaj Auto dropped 1.72% to Rs 1423.75.

India's largest car maker by sales Maruti Suzuki India fell 0.32% to Rs 1177.95 in choppy trade after the company said at the time of announcing Q1 June 2011 results today that the passenger car market was sluggish in Q1 June 2011, mainly due to a sharp increase in fuel prices and higher interest rates. Net profit rose 18% to Rs 549.20 crore on 3.3% increase in net sales to Rs 8319.90 crore in Q1 June 2011 over Q1 June 2010. Maruti's other income jumped 79.2% to Rs 180.07 crore in Q1 June 2011 over Q1 June 2010. The result was announced during trading hours today, 26 July 2011.

Maruti said higher commodity prices and foreign exchange volatility put pressure on profit margins in Q1 June 2011.

Reliance Communications (down 5.53%) and Bharti Airtel (down 2.04%), declined after these two stocks had soared 14% and 5.37%, respectively on Monday. Among other telecom stocks, MTNL (down 4.15%), Tata Teleservices (Maharashtra) (down 3.07%) and Idea Cellular (down 1.90%), tumbled. Telecom shares had surged recently after Bharti raised call rates prices in some regions.

HCL Technologies rose 0.13% to Rs 517 on expectations of strong Q4 results tomorrow, 27 July 2011. HCL Technologies is seen reporting strong Q4 June 2011 results on the back of volume growth and higher pricing. Consolidated net profit as per US accounting standards is seen rising 7.52% to Rs 503.44 crore on 5% growth in revenue to Rs 4345.08 crore in Q4 June 2011 over Q3 March 2011 as per average estimate of 5 brokerages.

Drug maker Glenmark Pharmaceuticals rose 2.63% to Rs 337.60 after the company announced during market hours today that consolidated net profit rose 23.2% to Rs 210.10 crore on 26.76% rise in total income to Rs 880.80 crore in Q1 June 2011 over Q1 June 2010.

Media company UTV Software Communications surged 5.39% to Rs 950.45 after the company received a proposal from promoter Walt Disney Company to delist the shares from all stock exchanges in India.

Pharmaceutical company Strides Arcolab rose 1.46% to Rs 372.60 after the company announced during market hours today that Onco Therapies, a wholly owned subsidiary has received United States Food & Drugs Administration (USFDA) approval for Gemcitabine for Injection USP in 200 milligram (mg), 1 gram (gm) and 2 gm dosage forms.

Agrochemicals major United Phosphorous (UPL) rose 1.10% to Rs 156.90 after the company announced before market hours today that it has acquired 51% stake in DVA Agro Do Brasil, which produces crop protection products and specialties in the Brazilian agrochemicals market. DVA Agro Do Brasil had net revenue of about $130 million for the year ended December 2010. UPL's acquisition of 51% stake in DVA Agro Do Brasil will be against an immediate cash outlay of about $150 million, which will accomplished through primary infusion of funds in the Brazilian firm and secondary purchase of shares from the existing shareholders, UPL said in a statement.

Commercial vehicle financier Shriram Transport Company slumped 3.41% to Rs 678 on profit taking. The company announced during market hours today that net profit rose 20.19% to Rs 347.30 crore on 13.87% rise in total income to Rs 1465.43 crore in Q1 June 2011 over Q1 June 2010.

Rushil Decor clocked a highest turnover of Rs 143.93 crore on BSE. State Bank of India (Rs 124.87 crore), UTV Software Communications (Rs 87.62 crore), Bharat Heavy Electricals (Rs 74.20 crore) and Reliance Communications (Rs 60.17 crore), were the other turnover toppers on BSE in that order.

Birla Cotsyn (India) reported highest volume of 1.06 crore shares on BSE. Rushil Decor (90.66 lakh shares), Future Ventures India (70.94 lakh shares), Lanco Infratech (66.80 lakh shares) and Orient Green Power Company (59.65 lakh shares), were the other volume toppers on BSE in that order.

The market may remain volatile in the near term as traders roll over positions in the derivatives segment from the near-month July 2011 series to August 2011 series ahead of the expiry of July 2011 derivatives contracts on Thursday, 28 July 2011.

The RBI has raised its end March 2012 inflation target to 7% as against the previous estimate of 6%, saying inflation has been higher than its expectations. It kept its economic growth forecast of 8% for this fiscal year. The current trends in money supply (M3) and credit growth remain above the indicative trajectory of the Reserve Bank of India, RBI said. Keeping in view the evolving growth-inflation dynamics, the indicative projection of M3 growth for 2011-12 has been revised downwards from 16%, as set out in the May 3 Policy Statement, to 15.5%. Non-food bank credit growth projection has also been revised downwards from 19% to 18%, RBI said.

Notwithstanding some moderation, global commodity prices, especially that of oil, continue to weigh on both domestic growth and inflation, RBI said. The future path of crude oil prices is uncertain. Should the recovery in advanced economies pick up, there may be upward pressure on prices, the RBI said. On the other hand, should the recovery stall, the easy liquidity conditions will continue to prevail leading to continued speculative positions which may prevent prices from softening, RBI said.

RBI said there are risks to the food inflation outlook. First, although the monsoon has been close to normal so far, deficient rainfall in August coupled with higher minimum support prices (MSP) could result in an upward movement in cereals and pulses price inflation. Second, inadequate supply response could keep price inflation of protein-rich items such as egg, meat, fish, milk and pulses high.

The Central Government has budgeted a fiscal deficit of 4.6% of GDP for 2011-12. Subsequent developments have made the achievement of this target much more of a challenge, RBI said. On the expenditure side, the subsidy burden will, in all likelihood, overshoot the budgeted amount in 2011-12 significantly, despite the recent revision in petroleum product prices. On the revenue side, while the tax cuts announced in June 2011, as part of the upward price adjustment of petroleum products, will primarily help in bringing down the magnitude of under-recoveries of oil marketing companies (OMCs), the revenue loss to the Central Government from such tax cuts (about 0.3% of GDP) will impact both the fiscal and revenue deficits.

The large fiscal deficit has been a key source of demand pressures, RBI said. Fiscal consolidation is, therefore, critical to managing inflation. While meeting quantitative targets, the Government also needs to focus on the quality of expenditure to sustain the fiscal consolidation process, which, in turn, will help contain aggregate demand and raise potential output, the RBI said.

Although the impact of past monetary policy actions is still getting transmitted, considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance, the RBI said. Going forward, the monetary policy stance will depend on the evolving inflation trajectory, which, in turn, will be determined by trends in domestic growth and global commodity prices, the RBI said. A change in stance will be motivated by signs of a sustainable downturn in inflation, it added.

The uncertain global macro-economic environment poses a challenge for the domestic economy from the perspective of financing the current account deficit. In this context, the composition of capital flows remains a concern. In recent months, some shift in composition of capital flows towards foreign direct investment (FDI) has been observed. This trend needs to be reinforced through policy actions to improve the quality of financing of the current account deficit, RBI said.

Reacting to the RBI's monetary policy review, Devendra Kumar Pant, Director, Fitch Ratings said, "RBI's monetary policy was announced in the backdrop of sticky inflation, growth moderation and uncertain global economic conditions. The hike in repo rate by 50 bps is mainly to control inflation, especially non-food manufactured inflation, which is going out of hand. This will certainly have its impact on economic growth, which is likely to be below 8%."

As the crucial corporate earnings season gathers steam, investors will closely watch the post-Q1 June 2011 result management commentary to gauge the future earnings outlook at a time when Indian firms are witnessing cost pressures amid rising interest rates and staff costs. A hike in transportation costs will add to cost pressure of India Inc. As per reports, freight rates have gone up by 8% to 9% on all routes across India following the recent hike in diesel prices.

UltraTech Cement, HCL Technologies, GAIL (India), Bank of Baroda, Infrastructure Development Finance Company (IDFC), Oil India and Lupin unveil results tomorrow, 27 July 2011. State-run oil exploration giant ONGC, FMCG giant Hindustan Unilever, Cigarette major ITC, Sun Pharma, cement majors--ACC and Ambuja Cements, Jindal Steel & Power, state-run Punjab National Bank, and GSFC unveil results on 28 July 2011. ICICI Bank, Power Finance Corporation, Bhushan Steel, Idea Cellular and TVS Motor unveil Q1 results on 29 July 2011. Sun TV announces Q1 results on 1 August 2011. Power Grid Corporation unveils Q1 results on 2 August 2011.

Bharti Airtel and United Spirits unveil Q1 results on 3 August 2011. Adani Power, Mundra Port And Special Economic Zone and Indian Hotels announce Q1 results on 4 August 2011. IL&FS Transportation Networks announces Q1 results on 5 August 2011. M&M announces Q1 results on 8 August 2011. ABB, Mahindra Satyam and GMR Infrastructure announce quarterly results on 9 August 2011. Tata Power unveils Q1 results on 10 August 2011. Tata Motors unveils Q1 results on 11 August 2011. Hindalco and Coal India unveil Q1 results on 12 August 2011. Aditya Birla Nuvo unveils Q1 results on 13 August 2011.

The pick up in the annual monsoon rains has improved crop prospects. Rainfall between July 14 and July 20 was 7% above the long-term average, according to the India Meteorological Department, following two successive weeks of below-average rains that raised concerns about crops. July is the crucial month for sowing rice, sugarcane, pulses and cotton. The seasonal rainfall deficit had widened to 3% below the long-term average last week, but now stands at 1% below normal. So far, 12% of the country has had below-average rainfall, while 88% had normal or excess showers. The June-September monsoon season brings about 70% of India's annual rainfall and is crucial for crops as about 60% of the country's farmland is rain-fed.

Gujarat, the country's largest producer of groundnut and cotton, had 80% below-average rains until the end of June, but now the gap has narrowed to 34%. However, poor rains in Andhra Pradesh are causing worries for rice plantings. As per reports, just about 9% of the state's rice area has been sown so far.

Meanwhile, former telecommunications minister Andimuthu Raja, who is facing trial in the country's biggest corruption scandal, deflected blame onto the prime minister in court on Monday, saying Manmohan Singh had knowledge of a key decision. Raja appeared in court denying wrongdoing in a case over the alleged manipulation of the sale of 2G telecoms spectrum licences in 2007-8 when he was telecommunications minister. Raja, a member of UPA coalition partner DMK, has been charged with flouting telecoms rules and accepting bribes to favour some firms when they sought lucrative mobile phone licences at rock bottom prices, possibly causing the state losses of $39 billion in revenue.

European stocks swung between gains and losses as investors eyed the gridlock in talks to raise the US debt ceiling. The key benchmark indices in UK and Germany were up 0.08% and 0.16%, respectively. France's CAC 40 was down 0.52%.

Most Asian markets edged higher on Tuesday, 26 July 2011, after US President Barack Obama on Monday, 25 July 2011, said that he's confident that lawmakers will reach an agreement on the debt ceiling by the August 2 deadline. The key benchmark indices in China, Hong Kong, Japan, Indonesia, Singapore, South Korea and Taiwan were up by between 0.47% to 1.28%.

The US is moving closer to an August 2 deadline, after which the Treasury says it will no longer be able to meet debt obligations. Obama said in an address to the nation Monday evening that should a downgrade occur, investors would wonder if the US was a "good bet." He said the current debt standoff was a "dangerous game" but added he was confident a compromise would be reached in Congress before the deadline. Speaking moments later, House Speaker John Boehner urged passage of a proposal from his Republican party, and also warned of the consequences of a default

Trading in US index futures indicated that the Dow could gain 26 points at the opening bell on Tuesday, 26 July 2011.