Market settles near 2-week high on strong Q1 GDP data

Strong Q1 June 2011 GDP growth data helped Indian shares extend Monday's (29 August 2011) strong rally, with the key benchmark indices attaining their highest closing level in nearly two weeks. The 50-unit S&P CNX Nifty regained the psychological 5,000 level. The market breadth was strong. The barometer index BSE Sensex jumped 260.42 points or 1.59%, up about 230 points from the day's low and off close to 40 points from the day's high. Index heavyweight Reliance Industries (RIL) jumped, extending Monday's rally. Hero MotoCorp and Idea Cellular hit 52-week highs.



The Sensex has jumped 827.92 points or 5.22% in two trading sessions from 18-1/2-month closing low of 15,848.83 on Friday, 26 August 2011. Earlier, the Sensex had tanked 3,022.46 points or 16.01% during a period of a little over one month to 18-1/2-month closing low of 15,848.83 on Friday, 26 August 2011, from a high of 18,871.29 on 25 July 2011.

Coming back to today's trade, metal stocks gained for the second straight day on bargain hunting after recent steep slide. Realty stocks also gained for the second straight day on bargain hunting after recent steep losses triggered by worries higher interest rates could dent demand for residential and commercial properties. DLF surged after the company said it is exploring various strategic options including the sale of its holding in the joint venture company which is undertaking the DLF IT Park, Noida project.

Bank stocks gained for the second straight day as financial stocks rose across Asia on news of a merger between Greece's EFG Eurobank Ergasias SA and Alpha Bank SA. IT stocks also rose for the second straight day after Federal Reserve Chairman Ben Bernanke on Friday, 26 August 2011, said he is "more optimistic" about the long-term prospects of the US economy even amid challenges from the slumping housing market and financial-market volatility. Oil exploration major ONGC slumped on concerns the government may price its follow-on public offer (FPO) at a discount to garner investor interest amid tough market conditions.

The market surged to 1-1/2-week high in early trade as Asian stocks rose. The market regained strength after trimming initial gains to hit fresh intraday low in morning trade. The market surged in mid-morning trade after the latest data showed that the Indian economy expanded 7.7% in Q1 June 2011 from a year earlier, helped by strong growth in the services sector. The data hit the market at 11:00 IST. The market once again trimmed gains to hit fresh intraday low in early afternoon trade. The market regained strength in afternoon trade as European shares rose in early trade. The market extended gains in mid-afternoon trade.

The BSE Sensex jumped 260.42 points or 1.59% to settle at 16,676.75, its highest closing level since 17 August 2011. The index jumped 298.37 points at the day's high of 16,714.70 in late trade. The index rose 27.02 points at the day's low of 16,443.35 in early afternoon trade.

The S&P CNX Nifty was up 81.40 points or 1.65% to settle at 5,001, its highest closing level since 17 August 2011. The Nifty hit a high of 5,016.25 in intraday trade. The Nifty hit a low of 4,927.55 in intraday trade.

The BSE Mid-Cap index rose 1.44% and the BSE Small-Cap index gained 1.1%. Both these indices underperformed the Sensex.

BSE clocked turnover of Rs 2605 crore, higher than Rs 1849.88 crore on Monday, 29 August 2011.

The market breadth, indicating the overall health of the market, was strong. On BSE, 1,843 shares rose and 995 shares fell. A total of 109 shares remained unchanged.

Among the 30-share Sensex pack, 24 rose while the rest fell. Tata Power Company, ITC and Bharti Airtel fell by between 0.16% to 0.97%.

Index heavyweight Reliance Industries (RIL) advanced 3.64% to Rs 781.50, extending Monday's 4.8% surge. The stock had hit 52-week low of Rs 713.55 in intraday trade on Friday, 26 August 2011. RIL announced after market hours today, 30 August 2011, the completion of BP's acquisition of a 30% stake in 21 oil and gas production sharing contracts that RIL operates in India, including the producing KG D6 block.

BP will pay RIL an aggregate consideration of $7.2 billion subject to completion adjustments for the interests to be acquired in the 21 production sharing contracts, the two companies said in a joint statement. Further performance payments of up to $1.8 billion could be paid based on exploration success that results in development of commercial discoveries, the two companies said.

Bank stocks gained for the second straight day as financial stocks rose across Asia on news of a merger between Greece's EFG Eurobank Ergasias SA and Alpha Bank SA. India's largest private sector bank by net profit ICICI Bank rose 1.77% to Rs 873.25, extending Monday's 4.63% jump. The stock had hit 52-week low of Rs 813.55 in intraday trade on Friday, 26 August 2011.

India's second largest private sector bank by net profit HDFC Bank gained 3.81% to Rs 472.20, extending Monday's 3.68% climb. The bank's American depository receipt, or ADR surged 3.04% to $31.22 on the New York Stock Exchange on Monday, 29 August 2011.

India's largest bank by branch network and net profit State Bank of India (SBI) rose 1.87% to Rs 1974.50, extending Monday's 2.62% gain. The stock had hit a 52-week low of Rs 1872 in intraday trade on Friday, 26 August 2011. SBI Chairman Pratip Chaudhuri last week said that the bank expects to launch a rights issue in the second half of this financial year. He said the government is considering infusing additional capital into the lender. SBI is looking to bolster its capital base to keep up with its fast-growing loan portfolio and expects the government to invest Rs 5000 crore-Rs 9000 crore in the rights issue. Chaudhuri said the bank is well-capitalized for loan growth of 16%-19% in the current fiscal year ending March 2012.

SBI's plan to raise about Rs 20000 crore in fresh capital was submitted to the Indian government--its biggest stakeholder--in 2010, but it is yet to receive a decision.

Rating agency Fitch Ratings last week said that Indian banks are better prepared to face asset quality challenges arising from the economic slowdown compared to 2008. In a study, Fitch said that banks have higher tier-1 capital and improved loan-loss reserves at the end of June 2011 against 2008. The government's injection of capital in state-owned banks in 2010 has helped most banks raise core tier-1 capital ratio above 8%. The report said that though banks' operating margins are likely to decline in the year ending March 2012 (FY 2012), the margins are likely to remain sufficiently robust to absorb credit costs for most banks.

Shares of non-banking finance companies (NBFCs) rose for the second day in a row after the release of new bank license norms and NBFC guidelines by the Reserve Bank of India during trading hours on Monday, 29 August 2011. LIC Housing Finance, SREI Infrastructure Finance, Rural Electrification Corporation, Power Finance Corporation, Reliance Capital and M&M Financial Services rose by between 1.37% to 5.42%.

New banks in India will be set up only through a wholly owned Non-Operative Holding Company (NOHC) to be registered with the Reserve Bank of India (RBI) as a non-banking finance company, the RBI said on Monday, 29 August 2011, in its draft guidelines for licensing of new banks in the private sector. Entities/groups in the private sector, owned and controlled by residents, with diversified ownership, sound credentials and integrity and having successful track record of at least 10 years will be eligible to promote banks, RBI said. Entities/groups having significant (10% or more) income or assets or both from real estate construction and/or broking activities individually or taken together in the last three years will not be eligible, the central bank said.

As per the RBI draft, the aggregate foreign shareholding in new banks shall not exceed 49% for the first 5 years. Private sector entities or groups owned and controlled by Indian promoters, with diversified ownership and having a successful track record of at least 10 years, will be eligible to promote banks, said the RBI draft. The draft also stated that the new bank should open at least 25% of its branches in unbanked rural centres. It also said that the new bank needs to get its shares listed on the stock exchanges within two years of licensing. Existing non-banking finance companies (NBFCs), if considered eligible, may be permitted to either promote a new bank or convert themselves into banks, RBI said.

Separately, a panel of the Reserve Bank of India (RBI) recommended higher risk weights on capital market exposures for some non-bank finance companies (NBFCs). The RBI panel, suggested in its report on issues and concerns in the NBFC sector, to impose a risk weight of 150% for capital market loans of those NBFCs that are not sponsored by a bank or do not have any bank as part of its group.

IT stocks rose for the second straight day after Bernanke said he is "more optimistic" about the long-term prospects of the US economy even amid challenges from the slumping housing market and financial-market volatility. The US is the biggest market for the Indian IT firms. India's largest software services exporter TCS rose 2.16%, extending Monday's 7.32% rally.

India's third largest software services exporter Wipro rose 1.78%, extending Monday's 3.12%. Wipro Technologies, the outsourcing services unit of Wipro, sees no impact to its hiring plans for this fiscal year due to global uncertainties. The company plans to hire 25%-30% more entry-level staff next financial year on expectations that demand for software services will rise. Wipro's upbeat hiring outlook comes amid concerns that economic uncertainties in the US and Europe--the main markets for outsourcing services--may affect the growth of India's technology companies.

Infosys gained 1.96%, extending Monday's 4.23% surge. As per recent reports the company has won a $29-million mobile banking deal from ANZ Australia, one of the largest listed companies in Australia with assets of AU$531.74 billion. The stock had hit 52 week low of Rs 2169 in intraday trade on Thursday, 25 August 2011. ANZ is a customer of Infosys' core banking product Finacle since 2006 and has used the solution to quickly expand its business in Asia. The deal is a positive sign for the sector, whose pipelines have been running dry of late, report said.

HCL Technologies jumped 6.13%, after the company announced during market hours today the signing of a strategic partnership with Basware, to enhance customers' purchase-to-pay processes.

India's largest oil exploration firm by market capitalization ONGC slumped 4.29% on concerns the government may price its follow-on public offer (FPO) at a discount to garner investor interest amid tough market conditions. The stock was the top loser from the Sensex pack. ONGC's chairman A.K. Hazarika said that the company's board of directors has approved a draft prospectus for the FPO. "Keeping the strong fundamentals of ONGC in view, we are confident that the response from the investors as well as from our present esteemed shareholders will be overwhelming and the government will successfully achieve its [fundraising] target," Hazarika said.

Hazarika didn't give any timeframe for filing the prospectus, but said the company expects to file it as per instructions from the government. The government plans to sell a 5% stake in the company from the 74.14% it holds as a part of its plan to raise Rs 40,000 crore through sale of shares in state-run companies in the current financial year through March to fund social-sector programs.

Idea Cellular jumped 3.84% to Rs 99.95. The stock hit 52-week high of Rs 101.50 today.

Realty stocks gained for the second straight day on bargain hunting after recent steep losses triggered by worries higher interest rates could dent demand for residential and commercial properties. Purchases of both residential and commercial property are largely driven by finance. Ackruti City, HDIL and Indiabulls Real Estate gained by between 2.2% to 4.22%.

Unitech gained 3.95%, extending Monday's gains triggered by a reprieve in the 2G scam. The Central Bureau of Investigation (CBI) told the special court on Monday, 29 August 2011, that it has no evidence that Unitech Wireless, which has been charged with cheating, criminal conspiracy and forgery in the 2G spectrum scam, paid bribes to former telecom minister A Raja. Public prosecutor UU Lalit told the court there was no evidence of a "quid-pro-quo or a money trail" between Unitech Wireless and Raja.

DLF jumped 6.42%, and was the top gainer from the Sensex pack. The stock extended Monday's 4.92% rally. With respect to media reports that DLF is in talks to sell its 70% stake in DLF IT Park in Noida to financial services firm IDFC, DLF has clarified that DLF IT Park, Noida is a joint venture in which DLF holds stake through a wholly-owned subsidiary. The subsidiary is exploring various strategic options including the sale of its holding in the joint venture company, DLF said.

Separately, IDFC said in its clarification that as a part of its normal business, IDFC does evaluate opportunities for loan and investments in infrastructure projects from time to time. In line with its normal businesses, IDFC is in talks with DLF for a business proposal, which may or may not lead to any deal. Shares of IDFC rose 2.57% after Monday's 5.72% jump.

Metal stocks gained for the second straight day on bargain hunting after recent steep slide. Hindalco Industries, Hindustan Zinc, Tata Steel, JSW Steel, Sterlite Industries, Sail, Nalco, Jindal Steel & Power, and Bhushan Steel rose by 0.98% to 5.62%.

Power Grid Corporation of India rose 0.25%. The company said after market hours today that the board of directors of the company during their meeting on 26 August 2011 approved the investment approval for ' Transmission System for IPP generation projects in Madhya Pradesh & Chhattisgarh ' at an estimated cost of Rs 1366.34 crore, with commissioning schedule of 27 months from the date of investment approval.

Anil Dhirubhai Ambani Group (ADAG) shares extended Monday's sharp gains triggered by a reprieve in the 2G scam. Reliance Communications (up 3.65%), Reliance Infrastructure (up 0.32%), Reliance Capital (up 1.8%), Reliance MediaWorks (up 1.29%), and Reliance Power (up 1.56%), edged higher.

Reliance Infrastructure on Friday, 26 August 2011, said it bought-back five lakh equity shares on Friday, 26 August 2011. So far, the company has bought back 34.79 lakh shares for Rs 192.96 crore, the company said. The company has announced an up to Rs 1000 crore buyback programme.

The Central Bureau of Investigation (CBI) told the special court on Monday, 29 August 2011, that the three Anil Dhirubhai Ambani Group (ADAG) executives who are in judicial custody were not part of the main 2G conspiracy. But Public prosecutor UU Lalit insisted there was credible evidence to frame charges of corruption and other penal offences against all 17 accused in the 2G spectrum scam and put them on trial. Following the day's arguments, the court said it would decide on 15 September 2011 whether to frame charges against A Raja, DMK MP Kanimozhi and 15 others on trial for their alleged role in the 2G spectrum allocation scam.

Coal India rose 1.53%. The stock will replace Reliance Capital in the 50-unit S&P CNX Nifty index from 10 October 2011. Earlier this month, Coal India had replaced another Anil Dhirubhai Ambani Group (ADAG) firm Reliance Infrastructure in barometer index BSE Sensex.

Some capital goods stocks edged lower. Larsen & Toubro, Thermax and Bhel fell by between 0.01% to 0.94%.

Auto shares rose ahead of the announcement of monthly vehicles sales figures, which will start trickling in from Friday, 2 September 2011. Tata Motors rose 1.45% to Rs 741.70, extending Monday's 4.56% gain. The stock had hit a 52-week low of Rs 695 in intraday trade on Friday, 26 August 2011. India's largest tractor and utility vehicles maker by sales Mahindra & Mahindra (M&M) rose 0.97%, extending Monday's 3.66% surge.

India's largest car maker by sales Maruti Suzuki India rose 1.14%, reversing initial losses, on reports the company may partially resume operations later Tuesday at its Manesar, Haryana unit where the auto maker has asked about 1,600 workers to sign a "good conduct bond". Maruti on Monday, 29 August 2011, halted production Manesar after it asked the workers to sign the bond before they can enter the factory premises. Maruti has reportedly suspended 16 workers and canceled the training for 12 technical trainees at Manesar for disciplinary reasons. The auto maker had on Monday, 29 August 2011, suspended 10 workers and dismissed five at Manesar as well as cancelled the training for six trainees.

India's second largest bike maker by sales Bajaj Auto rose 0.11%, extending Monday's 4.46% gain. Two-wheeler major Hero MotoCorp gained 3.57% to Rs 2047.85. The stock hit 52 week high of Rs 2,064.70 today. Two-wheeler and three-wheeler maker TVS Motor gained 1.1% to Rs 55.50. There are expectations of pick-up in sales of two-wheelers, cars and utility vehicles during the upcoming festive season. The festive season starts with Onam early next month and will last until Diwali, the festival of lights, at the end of October 2011.

India Securities clocked highest volume of 4.81 crore shares on BSE. Shree Ashtavinayak Cine Vision (82.40 lakh shares), IFCI (66.33 lakh shares), Resurgence Mines (63.95 lakh shares) and L&T Finance Holdings (56.43 lakh shares) were the other volume toppers in that order.

India Securities clocked highest turnover of Rs 283.23 crore on BSE. SBI (Rs 129.94 crore), RIL (Rs 69.03 crore), Tata Steel (Rs 61.61 crore) and Bajaj Finserv (Rs 61.52 crore) were the other turnover toppers in that order.

The stock market remains closed tomorrow, 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 latest data showed that the Indian economy expanded 7.7% in Q1 June 2011 from a year earlier, helped by strong growth in the services sector. The manufacturing sector grew an annual 7.2% in Q1 June 2011, while farm output rose an annual 3.9%, the data showed. The strong Q1 June 2011 GDP growth data is likely to prompt the Reserve Bank of India to continue raising interest rates when it undertakes mid-quarter policy review on 16 September 2011 to restrain inflation, which remains well above the central bank's perceived comfort level of 5% to 6%.

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. Farm secretary P. Basu today, 30 August 2011, said improved rainfall in August 2011 will likely result in record farm out in the crop year from that began on 1 July 2011. The rice output is expected to hit 86 million-87 million metric tonnes this year, a significant increase from the 80.65 million tons produced last year. Sufficient rainfall now will also leave enough soil moisture for winter-sown crop such as wheat, Basu said. 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.

European markets reversed initial gains on Tuesday, 30 August 2011, in the wake of data that showed a sharp fall in an economic sentiment indicator for the euro zone. The European Commission said the economic sentiment indicator fell to 98.3 in August from 103.0 in July, against expectations of a more modest fall. The key benchmark indices in Germany and France were down by between 0.21% to 0.65%. UK's FTSE 100 rose 2.35%.

Most Asian stocks rose on Tuesday, 30 August 2011, with resources and banking firms among the best performers, as improving global sentiment encouraged buying. The key benchmark indices in Hong Kong, Japan, South Korea, and Taiwan were up by between 0.78% to 1.71%. China's Shanghai Composite fell 0.38%. The stock markets in Singapore and Indonesia are shut for holiday.

Financial stocks rose in Asia on news of a merger between Greece's EFG Eurobank Ergasias SA and Alpha Bank SA.

Trading in US index futures indicated that the Dow could fall 45 points at the opening bell on Tuesday, 30 August 2011. US stocks surged on Monday, 29 August 2011, with confidence buoyed by an upbeat personal-spending report and relief that damage caused by Tropical Storm Irene wasn't more severe. Consumer spending recorded its largest increase in five months in July, supporting views the economy was not falling back into recession.

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.