Market may extend gains for the second straight day; Q1 GDP data in focus

The market may extend Monday (29 August 2011)'s 3.58% surge on firm Asian stocks. Trading of S&P CNX Nifty on the Singapore stock exchange indicates a gain of 63 points at the opening bell. On the macro front, the government will unveil data on first quarter GDP growth today, 30 August 2011, which may provide cues on the central bank's likely policy stance at its mid-quarter policy review on 16 September 2011.

An optimistic assessment of the US economy from Federal Reserve Chairman Ben Bernanke on Friday, 26 August 2011, boosted stocks across the globe and Indian shares were no exception on Monday, 29 August 2011. The US is the world's biggest economy. The end of a standoff between the government and anti-corruption activist Anna Hazare during the weekend over anti-corruption bill, also aided the rally on the domestic bourses as the barometer index BSE Sensex regained the psychological 16,000 mark. The BSE Sensex jumped 567.50 points or 3.58% to settle at 16,416.33, its highest closing level since 23 August 2011.



Foreign institutional investors (FIIs) have pressed heavy sales this month amid the ongoing credit crisis in the euro zone. The sustained selling by foreign funds is a cause for concern for India Inc. Foreign portfolio inflow acts as a catalyst to private corporate capital expenditure in India. Foreign institutional investors (FIIs) provisionally bought shares worth net Rs 366.19 crore on Monday, 29 August 2011 when markets rose 3.58%. FII outflow in August 2011 totaled a massive Rs 12027.25 crore (till 29 August 2011), as per data from the stock exchanges.

FIIs have sold shares worth a net Rs 17066.49 crore in calendar year 2011 so far, till 26 August 2011, as per data from the stock exchanges. Domestic institutional investors have bought shares worth a net Rs 22491.77 crore this year so far.

The stock market remains closed on Wednesday, 31 August 2011, on account of Ramzan Id and again on Thursday, 1 September 2011, on account of Ganesh Chaturthi.

As per a recent survey by a prominent investment bank, Corporate India will raise capital spending by tepid 10% in the year to March 2012 (FY 2012). Capital expenditure (capex) in FY 2012 will be concentrated on improving productivity rather than adding greenfield capacity, the investment bank said.

The Reserve Bank of India (RBI), last week, said that there is a need to rebalance demand from consumption to investment by stepping up savings in the economy. In order to achieve a 9% growth in Twelfth Five Year Plan (2012-17), the investment rate of 40.5% would be required if incremental capital output ratio (ICOR) remains unchanged from 4.5% during the Eleventh Plan. This requires augmenting saving as well as bringing about technological and institutional improvements to lower ICOR.

In its annual report for 2010-2011 released on Thursday, 25 August 2011, RBI said that there is a need to step up savings in the economy. The current account deficit (CAD) that finances the saving-investment gap has averaged less than 1% of GDP over past two decades. Even assuming a higher a CAD/GDP ratio of 2%, gross domestic saving (GDS) rate need to be raised by about 5 percentage points from 33.7% in 2009-10, RBI said. This underscores, the importance of augmenting saving as well as bringing about technological and institutional improvements to realize higher growth through higher investments and lower ICOR.

Overall investment requirements and the need for continued sustainability on current account, thus underscore the need for attaining the highs of private corporate and public sector savings reached in the recent past and exploring the possibility of invoking an upward shift in household savings which have remained stable for many years, RBI said.

RBI said there could be some pressure on CAD if the global economy weakens significantly and affects exports. With adequate foreign exchange reserves, India remains capable of handling any pressures emanating from the external sector in the near term. However, from a medium to long term perspective, it is important to improve resilience of external account by pursuing policies that shift the composition of capital flows so as to reduce dependence on its volatile components, RBI said. Augmenting foreign direct investment (FDI) further could bring about a better balance between different components of capital flows and reduce the possibility of volatile currency movements and any pressure on reserves in the face of contagion risks, RBI said.

RBI said tackling food inflation also needs a strategy to break the inertial element arising from rising real wages leading to increases in the Minimum Support Price (MSP), which in turn lead to higher food inflation that feeds back to higher wages with an element of indexation. Rural wage programmes need to be linked with productivity, RBI said. If productivity improves, real wages can rise without putting pressure on prices. The inclusion agenda can then be pursued on a sustainable basis without drag on inflation and the fiscal position.

Transmission of inflation from abroad has also been an important element in keeping inflation high in the recent years, RBI said. International commodity prices remain a potential threat as global liquidity is still far too large due to monetary policy accommodation by advanced countries, RBI said. Fuel and food security would need to be given particular attention. There is a need for environmentally sustainable solutions to manage energy security. Free pricing of petroleum products can help, as a large population cannot be subsidised in an import dependent item, RBI said.

The central bank also said that pricing power in the manufacturing sector has macro as well as micro angles. A competition policy has been put in place and industrial organisation structures could be studied along with price information to stamp out anti-competitive practices and collusive behavior. Such behavior also adds to inflationary pressures and needs to be curbed, RBI said.

RBI said inflation is likely to remain high and moderate only towards the latter part of the year to about 7% by March 2012. The recent decline in global commodity prices has not been very significant, RBI said. If the global recovery weakens ahead, commodity prices may decline further, which should have a salutary impact on domestic inflation, RBI said. The pass-through of the rise in global commodity prices so far has been incomplete, especially in the minerals and oil space. As such, the benefit of a moderate fall in global commodity prices on domestic price level would also be limited, RBI said.

If global oil prices stay at current level, further increase in prices of administered oil products will become necessary to contain subsidies. Fertiliser and electricity prices will also require an upward revision in view of sharp rise in input costs, RBI said. The high and persistent inflation over the last two years has brought to the fore the limitation in arresting inflation in absence of adequate supply response. However, monetary policy still has an important role to play in curbing the second round effects of supply-led inflation, RBI said. In face of nominal rigidities and price stickiness, there are dangers of accepting elevated inflation level as the new normal, the central bank said.

The food price index rose 9.8% and the fuel price index climbed 13.13% in the year to 13 August 2011, government data on Thursday, 25 August 2011, showed. In the previous week, annual food and fuel inflation stood at 9.03% and 13.13% respectively. The primary articles index was up 12.4%, compared with an annual rise of 11.64% a week earlier.

The near-term prospects for agricultural sector remain good. The rainfall deficit in the country had widened to 5% of the long-term average in July 2011, but a pickup in August 2011 helped narrow the deficit to 1% by 24 August 2011. Good rains could help boost rural income and may help bring down food inflation.

Meanwhile, Indian firms relying on European and US markets are worried about a likely economic slowdown in the US and Europe. Bilateral trade between India and the US stood at $36.5 billion in 2010.

Commerce Minister Anand Sharma recently said India's discussions with the European Union (EU) and Canada to form free-trade agreements are in advance stages. India aims to boost bilateral trade with Canada to C$15 billion (US$15.3 billion) a year by 2015 from about C$4.2 billion in 2010. With the 27-member EU, India had initiated discussions on the free-trade pact in 2007. The two sides originally hoped to conclude a wide-ranging deal by 2010 to boost trade to $237 billion annually by 2015. Their bilateral trade is currently worth about $92 billion.

Asian stocks rose on Tuesday after better-than-expected U.S. consumer spending data and a bank merger in Greece improved outlook for indebted developed world economies. The key benchmark indices in China, Hong Kong, Japan, South Korea, and Taiwan rose by between 0.95% to 2.25%.

U.S. stocks soared more than 2% in a broad rally on Monday as a merger between two big Greek banks provided a rare bit of encouraging news out of debt-stricken Europe. Consumer spending recorded its largest increase in five months in July, supporting views the economy was not falling back into recession. And while the number of signed contracts for home sales fell 1.3% in July, the decline matched forecasts and managed to top year-ago levels.

The main event this week is the US employment report for August 2011 due on Friday, 2 September 2011. Economists expect non-farm payrolls to rise by a paltry 46,000 after a less-than-impressive 117,000 rise in July 2011. The unemployment rate is forecast to remain unchanged at 9.1%. The US market remains closed on Monday, 5 September 2011, for the Labour Day holiday.