Market may halt six-day slide on recovery in global markets

A recovery in global equities post a recent sell-off may help Indian equities break their six-day declining trend. Markets across the globe rose after the Fed pledged to keep its key interest rate at its record low of nearly zero through the middle of 2013. Trading of S&P CNX Nifty on the Singapore stock exchange indicates a rise of 64.50 points at the opening bell.

Foreign institutional investors (FIIs) sold shares worth a massive Rs 2104.56 crore on Tuesday, 9 August 2011, as per provisional data from the stock exchanges. Domestic institutional investors (DIIs) absorbed most of the heavy selling by foreign funds, with purchases of shares worth Rs 1412.96 crore on that day, as per data from the stock exchanges. FII outflow in August 2011 totaled Rs 4211.50 crore (till 8 August 2011). FIIs had bought shares worth a net Rs 8030.10 crore in July 2011. FII inflow in calendar 2011 totaled Rs 6489 crore (till 8 August 2011).



Meanwhile, the government may reportedly cut prices of petrol and other fuel if global crude prices continue to slip further. Global crude oil prices declined steadily after credit rating agency Standard and Poor downgraded the sovereign debt of the US. A cut in prices of fuel if any will help cool the stubbornly high inflation, which has been troubling policymakers for over two years. Petrol prices were de-regulated last year while other fuels like diesel, kerosene and cooking gas are still under government control.

Data showing recent heavy selling by FIIs and growing fears of another recession in the US, the world's biggest economy, pushed Indian shares lower for the sixth day in a row. The BSE Sensex shed 132.27 points or 0.78% to settle at 16,857.91, its lowest closing level since 9 June 2010. The S&P CNX Nifty was down 45.65 points or 0.89% to 5,072.85, its lowest closing level since 9 June 2010

The Sensex has tumbled 2,013.38 points or 10.66% in eleven trading sessions from a recent high of 18,871.29 on 25 July 2011. The barometer index has lost 17.8% in calendar 2011.

The Q1 June 2011 earnings season is drawing towards a close. Investors are focusing on 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.

Tata Power and Rural Electrification Corporation unveil Q1 results today, 10 August 2011. Tata Motors, Reliance Infrastructure, Reliance Power, Castrol India and Shipping Corporation of India unveil quarterly results on Thursday, 11 August 2011.

Tata Steel, Hindalco Industries, Coal India, National Aluminium Company, Jaiprakash Associates, Unitech and HPCL unveil Q1 results on Friday, 12 August 2011. State Bank of India, Aditya Birla Nuvo, Reliance Communications, Reliance Capital and Shipping Corporation of India unveil Q1 results on Saturday, 13 August 2011.

The government on Tuesday, 9 August 2011, approved the extension of the term of Dr. D. Subbarao as the Governor of the Reserve Bank of India (RBI). Dr. Subbarao's term has been extended for a period of two years with effect from 5 September 2011 up to 4 September 2013. Commenting upon his re-appointment, Subbarao said, "I am happy that the government has reposed its confidence in me at this difficult juncture in the world economy. I look forward to working with a great team in the RBI to meet the many challenges ahead."

Thomas Mathew, joint secretary of capital markets on Tuesday, 9 August 2011, said the country's stock markets are likely to remain volatile in the near term, tracking pan-Asian jitters following the US credit downgrade and local state-run companies should decide themselves when to step in to support the market. India's economic fundamentals remain strong and its share markets would attract strong overseas capital amid the global uncertainty, Mathew said. He doesn't expect any payment problems to plague Indian share markets after a recent steep slide.

The Reserve Bank of India (RBI) on Monday, 8 August 2011, said that the US rating downgrade has raised concerns of continuing turmoil in global financial markets as investors re-allocate portfolios in response to heightened risk perceptions stemming from the latest developments. As Friday's (5 August 2011) market behaviour demonstrated, India is not insulated from such developments, RBI said. It may, however, be noted that in the worst phase of the recent global financial crisis, the Indian economy grew by 6.8%, suggesting high resilience emerging from domestic factors, the RBI said in a statement.

While downside risks to growth may have increased in the wake of global developments, they are likely to have limited impact, RBI said. However, the policy and regulatory framework must anticipate and be prepared to respond to turbulent financial market conditions arising out of external developments, RBI said. In the immediate future, the RBI's priority is to ensure that adequate rupee and forex liquidity are maintained in domestic markets to prevent excessive volatility in interest rates and exchange rates.

Rupee liquidity is being provided through the Repo window of the Liquidity Adjustment Facility (LAF). As of now, the banking system does not face any liquidity pressures as evident from the low level of dependence on liquidity injections under the LAF, RBI said. In any case, the banking system currently has an adequate stock of Statutory Liquidity Ratio (SLR) securities, which are eligible for Repo transactions, RBI said. Further, the capacity of the LAF to inject liquidity has recently been augmented by the introduction of the Marginal Standing Facility (MSF), which allows banks to draw down SLR securities up to a further one per cent of their Net Demand and Time Liabilities (NDTL) in order to meet liquidity requirements. This will help stabilize the call rate within the LAF corridor, which is currently 7% to 9%, RBI said.

As regards forex liquidity, in anticipation of financial market turbulence related to the US debt ceiling impasse, the RBI recently made an assessment of the ability of the forex reserve portfolio to meet potential forex requirements in the event of significant capital outflows. This exercise indicated that there were sufficient liquid reserves to meet the demand for forex even in stress scenarios, RBI said.

RBI said it is closely monitoring all key indicators and will continuously assess the impact of global developments on rupee and forex liquidity and macroeconomic stability. "We will respond quickly and appropriately to the evolving situation, "RBI said.

Finance Minister Pranab Mukherjee on Monday, 8 August 2011, said the government will give an impetus to domestic growth drivers. "Our economic fundamentals are sound and we would also focus on encouraging greater domestic consumption and give impetus to the drivers of domestic growth," Mukherjee told reporters. He was reacting to questions on the impact of the US debt rating downgrade and the debt troubles in the euro zone on the Indian economy. Mukherjee also said that the government would fast-track economic reforms and that the Indian economy remains an attractive investment destination for foreign investors despite the global growth slowdown worries. Mukherjee on Tuesday, 9 August 2011, said the decline in global crude prices will help in managing India's inflation.

Chief economic adviser Kaushik Basu on Monday, 8 August 2011, said while India would be affected in the short term by a US economic slowdown, it had potential to benefit in the future. "We have a slew of instruments available with the finance ministry, the government and the Reserve Bank of India, and, should the need arise, the government and the central bank are in a position to step in," Basu told reporters on Monday. Basu expects India's brisk economic growth could be a magnet for global capital inflows, a thought shared by the finance minister.

Monsoon rains were 22% below normal in the week to 3 August 2011, recording marginal improvement from 23% below average showers in the previous week. Total rainfall since the beginning of the June-September monsoon season has been 6% below average. Rainfall has been normal or above in 73% of the country so far this season, while 27% of the country is facing a deficit. In some parts of eastern India such as Orissa, Bihar and Jharkhand, rainfall is below normal, but in the key rice-growing state of West Bengal rainfall is above normal. A rainfall deficit in the southern state of Andhra Pradesh, a top rice-producer, has largely been bridged.

In the northern grain bowl region of Punjab, the monsoon rain deficit is 26%. However, since most farmland in Punjab is irrigated, rice production may not be adversely affected in the state. But, low rainfall in the western regions is likely to adversely affect the output of groundnut, the second biggest summer-sown oilseed crop after soybean. In Gujarat, rainfall is 37% below average.

The Reserve Bank of India (RBI) raised its key lending rates by 50 basis points at a policy review on 26 July 2011, to tame high inflation. RBI had at time said that 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. A change in stance will be motivated by signs of a sustainable downturn in inflation, it had added.

Asian stock markets jumped Wednesday following a surge on Wall Street prompted by an unprecedented pledge from the US Federal Reserve to keep interest rates super low for the next two years. The key benchmark indices in Taiwan, South Korea, Indonesia, Hong Kong, China and Japan were up by between 1.15% to 3.62%. Singapore's Straits Times was down 0.36%.

U.S. stocks notched the biggest gain in more than two years amid a seesaw session Tuesday following the worst selloff since the financial crisis, as investors applauded the Federal Reserve's pledge to keep interest rates near zero at least through mid-2013.

The Dow Jones Industrial Average finished up 429.92, or 3.98%, at 11239.47. The Standard & Poor's 500-stock index rose 53.07 points, or 4.74%, to 1172.53 and the Nasdaq Composite gained 124.83 points, or 5.29%, to 2482.52.

The Federal Reserve said on Tuesday it will keep its hefty monetary policy stimulus for at least another two years, an effort to support a flagging economy and fragile global markets that faced considerable internal dissent. The Fed said US economic growth was proving considerably weaker than expected, suggesting inflation, which has already moderated recently, will remain contained for the foreseeable future.

Standard & Poor's on Friday, 5 August 2011, downgraded the US long-term debt rating to AA+ from AAA with a negative outlook, meaning it can be lowered again within two years.