Market seen extending five-day sell-off on global carnage

The market is geared for a dismal start on weak global cues amid growing alarm the US, the world's biggest economy, is sliding back into recession. Trading of S&P CNX Nifty on the Singapore stock exchange indicates a slump of 201 points at the opening bell.

Key benchmark indices fell for the fifth straight day on Monday, 8 August 2011 to hit 14-month closing lows as an unprecedented downgrade of the US credit rating by Standard & Poor's on Friday, 5 August 2011, led investors to reduce exposure to assets perceived as risky and escalated worries about global economic outlook. The BSE Sensex lost 315.69 points or 1.82% to settle at 16,990.18, its lowest closing level since 10 June 2010 and the S&P CNX Nifty declined 92.75 points or 1.78% to 5,118.50, its lowest closing level since 10 June 2010.



The Sensex has tumbled 1,881.11 points or 9.97% in ten trading sessions from a recent high of 18,871.29 on 25 July 2011. Since the beginning of the year, the Sensex has lost 17.15%, making it the worst-performing among major Asian markets.

FIIs sold shares worth a massive Rs 1385.78 crore on Monday, 8 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 1320.38 crore on that day, as per data from the stock exchanges.

Foreign institutional investors (FIIs) dumped shares worth net Rs 1609.60 crore on Friday, 5 August 2011, sharply higher than an outflow of Rs 146.70 crore on Thursday, 4 August 2011, the latest data released by the Securities & Exchange Board of India (Sebi) showed. FII outflow in August 2011 totaled Rs 3101.80 crore (till 5 August 2011). FIIs had bought shares worth Rs 8030.10 crore in July 2011. FII inflow in calendar 2011 totaled Rs 7598.70 crore (till 5 August 2011).

A Group of Ministers headed by Finance Minister Pranab Mukherjee on Friday, 5 August 2011, reportedly approved the recommendation of the Saumitra Chaudhuri committee that urea pricing should be decontrolled. According to reports, the government has decided to raise urea prices by 10% per tonne in the first year of the policy, after which the industry would be free to determine the urea prices. The decision of the Group of Ministers, headed Finance Minister Pranab Mukherjee, will now go to the Cabinet Committee on Economic Affairs for final approval.

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.

ABB, Tata Communications, Mahindra Satyam, GMR Infrastructure and VIP Industries will announce their quarterly results today, 9 August 2011. Tata Power and Rural Electrification Corporation unveil Q1 results on Wednesday, 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 and Shipping Corporation of India unveil Q1 results on Saturday, 13 August 2011.

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.

Chief economic adviser Kaushik Basu 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. 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 markets declined on Wednesday as economic concerns overshadowed the last-minute US debt deal. The key benchmark indices in South Korea, Indonesia, Hong Kong, Taiwan, China and Japan were down by between 1.69% to 7.73%.

Global ratings major S&P had 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.

US stocks tumbled on Tuesday, dragging benchmark indexes to their biggest slump since December 2008, amid concern that a downgrade of the nation's credit rating by Standard & Poor's may worsen an economic slowdown.

The Dow Jones Industrial Average shed 5.55% or 634.76 points at 10809.85. The Nasdaq Composite fell 6.9% or 174.72 points at 2357.69 and the Standard & Poor's 500 declined 6.66% or 79.92 points at 1119.46.

Fear continued to dominate after the unprecedented downgrade of the United States by Standard & Poor's on Friday and a warning from the head of the European Commission Thursday that the debt crisis in the eurozone had likely spilt over into other economies.

Finance ministers and central bank governors at the Group of 20 industrialized and developing nations on Monday, 8 August 2011, said they were committed to take "all necessary initiatives in a coordinated way" to support financial stability and to foster stronger economic growth. Without detailing specifics, the G20 officials said they will remain in close contact and "cooperate as necessary" in the coming weeks to ensure stability and liquidity in the financial markets.

The statement comes amid fears of economic fallout from Standard & Poor's downgrade of US credit ratings and ongoing worries over the euro zone debt crisis. The Group of Seven developed nations had also said Sunday that it was ready to respond as needed to take coordinated action, including to ensure liquidity and support financial market functioning and economic growth

All eyes are now on the US Federal Reserve's one-day policy meeting today, 9 August 2011. At their last meeting in June 2011, Fed officials decided to keep the central bank's balance sheet at a record to spur the slowing economy after completing $600 billion of bond purchases. The Fed has held its target for the short-term federal-funds rate inside a lowest-ever range of 0% to 0.25% since December 2008.