Market geared for a strong start on upbeat global cues

The market is likely to see a strong start on upbeat global cues. Also bargain hunting after prior four days of decline may support gains. Trading of S&P CNX Nifty on the Singapore stock exchange indicates a surge of 85 points at the opening bell. Volatility is expected to rise this week as traders roll over positions in the futures & options (F&O) segment from the near-month September 2011 series to October 2011 series. The September 2011 derivatives contracts expire on Thursday, 29 September 2011.



Shares of Reliance Industries may hog limelight after the upstream regulator, Directorate General of Hydrocarbons (DGH) has reportedly given RIL the go ahead to drill eight wells at an estimated capex of $1.5 billion.

Foreign institutional investors (FIIs) sold shares worth Rs 1083.83 crore on Monday, 26 September 2011, as per provisional data from the stock exchanges.

Meanwhile, the downbeat market sentiment may get a boost on reports the government is considering a cut in the Securities Transaction Tax (STT) as it has not generated much revenue. The Finance Ministry, too, is considering a rationalised and uniform stamp duty on securities transactions. The STT is levied on sale and/or purchase of shares, equity-oriented mutual funds and futures and options in securities. Reportedly two departments of the Ministry, Economic Affairs which is responsible for development of capital market and Revenue which is responsible for taxation have finalised various provisions. Now, the Finance Minister, Mr Pranab Mukherjee, will take a final call and then the proposal will be taken to the Cabinet, reports added.

Key benchmark indices dropped for the fourth day in a row on Monday, 26 September 2011 to hit one-month closing lows as fears of weak Q2 September 2011 results and data showing heavy selling by foreign funds recently, weighed on investor sentiment.

The BSE Sensex shed 110.96 points or 0.69% to settle at 16,051.10, its lowest closing level since 26 August 2011. The S&P CNX Nifty was down 32.35 points or 0.66% to settle at 4,835.40, its lowest closing level since 26 August 2011.

From a recent high of 17,099.28 on 20 September 2011, the Sensex has slumped 1,048.18 points or 6.12% in four trading sessions. The Sensex has fallen 625.65 points or 3.75% in this month so far. The index has slumped 4,457.99 points or 21.73% in calendar 2011. From a 52-week high of 21,108.64 on 5 November 2010, the Sensex has lost 5,057.54 points or 23.95%. From a 52-week low of 15,765.53 on 26 August 2011, the Sensex has risen 285.57 points or 1.81%.

The advance tax payment by top 100 companies rose a modest 9.9% in Q2 September 2011 from a year ago against 19% growth in Q1 June 2011, suggesting corporate profit growth is likely to be muted in the second quarter. Among the big companies that have paid lower advance tax, indicating a drop in profits, include State Bank of India (SBI), Maruti Suzuki and state-run Neyveli Lignite Corporation. SBI's advance tax payment declined 14.2% to Rs 1650 crore in Q2 September 2011. Maruti's tax payment fell 55.8% to Rs 120 crore. Neyveli Lignite tax payment plunged 50.1% to Rs 66 crore. But, Reliance Industries' (RIL) advance tax payment jumped 37.6% to Rs 1800 crore, hinting at good Q2 results from the diversified firm.

Investors will closely watch the management commentary at the time of announcement of Q2 September 2011 results, which will provide cues on futures earnings outlook. IT bellwether Infosys kickstarts the Q2 September 2011 earnings season on 12 October 2011. Housing finance major HDFC unveils Q2 results on 17 October 2011.

Market regulator Securities and Exchange Board of India (Sebi) on Friday, 23 September 2011, notified the new takeover code which makes it mandatory for entities buying more than 25% stake in a listed firm to buy an additional 26% from the public. The new code will come into effect from 23 October 2011. Under existing norms, the trigger for making an open offer is 15% while the offer size has to be 20%. In July, Sebi board had approved the recommendations of the takeover panel with some changes. The new norm exempts inter se transfers of shares among promoters from making an open offer. The new norms also does away with the non-compete fee.

A news agency quoted principal economic adviser to the ministry of finance Dipak Dasgupta as saying that the government has no plans to tax or impose restrictions on capital outflows. He said the government will instead focus on liberalising fund inflows into the economy, particularly via overseas borrowing.

Finance Minister Pranab Mukherjee recently said central banks in emerging economies have been forced to raise interest rates repeatedly as they battle high inflation, exposing them to volatile capital flows. "An issue of immediate concern for emerging economies is managing large capital flows," he said. "Large and volatile capital flows to emerging markets can be destabilizing as they lead to high exchange rate volatility and in some cases make it incumbent to maintain high levels of foreign exchange reserves as an insurance against sudden and large-scale flight of international capital."

The government recently raised the limit of overseas borrowing for companies to $750 million from $500 million. Indian companies can also now raise loans up to $1 billion in Chinese yuan. The relaxation of overseas borrowing rules will help Indian companies tap cheaper cash abroad amid rising credit costs in the local market. US and European countries have near-zero interest rates in a bid to support weak economic growth.

The government recently cleared the ambitious $90-billion Delhi-Mumbai industrial corridor. The Delhi-Mumbai industrial corridor project will set up nine mega industrial zones of about 200-250 square kilometre (km) along with a 1,500 km high speed freight line connecting the two cities. It will include three ports and six airports, as well as a six-lane intersection-free expressway connecting the two cities and a 4,000 megawatts (MW) power plant and also set up seven new cities.

The public private partnership (PPP) approval committee recently approved projects worth Rs 18000 crore that include a housing project for para-military forces and a road project among others.

A memorandum of understanding (MoU) was signed recently between India Infrastructure Finance Company (IIFCL), LIC and IDFC with respect to the Takeout Finance Scheme (TFS). Under the MoU, the project lender(s) will offer eligible infrastructure projects to IIFCL for availing takeout financing. Finance Minister Pranab Mukherjee said he expects this mechanism will help financing to the tune of Rs 30000 crore, adding this will facilitate banks to take more exposure in new projects, which in turn will help in bridging the gap in infrastructure financing.

Given the lackluster initial FII response to the government's sharply raising the ceiling of FII investment in long-term corporate bonds issued by the companies in the infrastructure sector in March 2011, the government on 12 September 2011, further relaxed the norms on FII investment in such bonds. The Finance Ministry said in a statement that FIIs can now invest in long-term infra bonds, subject a ceiling of $5 billion limit, which have an initial maturity of five years or more at the time of issue and residual maturity of one year at the time of first purchase by FIIs. These investments are subject to a lock-in period of one year. FIIs can trade amongst themselves in these bonds but cannot sell to domestic investors during the lock-in period of one year.

FIIs can also now invest, subject to a ceiling of $17 billion, in long-term infra bonds which have an initial maturity of five years or more at the time of issue and residual maturity of three years at the time of first purchase by FIIs. These investments are subject to a lock-in period of three years. During the three-year lock-in period, FIIs can trade amongst themselves but cannot sell to domestic investors. The Securities & Exchange Board of India (Sebi) is expected to issue notifications incorporating these changes in the scheme by 15 October 2011.

Sebi had in early August 2011 allowed Qualified Foreign Investors (QFIs) to subscribe to Mutual Fund Debt Schemes which invest in the infrastructure sector subject to a total overall ceiling of $3 billion within the total ceiling of $25 billion.

Planning Commission deputy chairman Montek Singh Ahluwalia on 12 September 2011, said at a conference that private funding has to make up half of the infrastructure investment of $1 trillion planned for in the five years during 2012-2017. Prime Minister Manmohan Singh also said at that conference that to overcome the fund crunch for infrastructure projects, the government has proposed to set up a $11 billion fund to help finance infrastructure projects. "We have also constituted a high-level committee to suggest measures necessary for financing our ambitious program in infrastructure development," Mr. Singh said.

Food prices edged higher in the week ended 10 September 2011 as protein-rich foods kept becoming more expensive, offsetting a decline in vegetable and fruit prices and putting paid to hopes that inflationary pressures will ease anytime soon. The Reserve Bank of India (RBI) said at a monetary policy review on 16 September 2011 that it is imperative to persist with the current anti-inflationary stance because a premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. The RBI raised repo rate by 25 basis points on 16 September 2011.

For India, a weak rupee will offset the benefit of the recent steep fall in global commodity prices triggered by global growth worries. Most commodities imported by India, particularly oil, are denominated in dollars making these expensive for India. The rupee shed 4.4% of its value last week, its biggest fall since the week ended 12 July 1996.

Going forward, the stance of the monetary will be influenced by signs of downward movement in the inflation trajectory, to which the moderation in demand is expected to contribute, and the implications of global developments, RBI said in its 16 September 2011 policy statement. The overall tone of the RBI's latest policy was softer than the previous policy announcement which was extremely hawkish.

Reserve Bank of India Deputy Governor Subir Gokarn on Sunday, 25 September 2011, said the decline in the rupee in "so short a time" is a concern that reflects volatility in global financial markets. Sharp movements in the currency can be disruptive and tend to trigger panic, he said in a speech in Washington. India has not intervened with an exchange-rate target in mind for a long time and there are no plans to change the policy, he said.

"We do see that very sharp movements intra-hour or intra- day can be disruptive," Gokarn said. "They tend to trigger panic, entry or exit. In that situation, we feel that there is some merit in smoothing, infusing dollars to ensure that movement is moderated. That is something we would consider."

Inflation in India remains high and will probably remain in a range of 9% to 10% until November 2011, Gokarn said. RBI said on 16 September 2011 that corporate margins moderated across several sectors in Q1 June 2011 compared to levels in Q4 March 2011. However, barring a few sectors, significant pass-through of rising input costs is still visible, RBI said.

Shankar Acharya, a member of the Reserve Bank of India's monetary policy advisory panel, on Thursday, 22 September 2011, said the repo rate is "near the peak". He added that the central bank has to keep its short-term interest rate high as it solely battles stubborn inflation. The tight monetary policy is likely to stay until March-end before the inflation rate starts showing distinct signs of easing, Mr. Acharya said. A widening fiscal deficit would further stoke inflationary pressures, leaving little room for the RBI to ease its policy, Acharya added.

Though inflation will remain the RBI's prime concern, its next action will also depend on how the global economic woes shape out, Mr. Acharya said. "We are poised at the cusp of another very difficult period," Mr. Acharya said, adding that future RBI actions will take note of external risks in a big way, as past rate hikes have started hurting investments in the economy.

Finance Minister Pranab Mukherjee said at a conference in the US on 21 September 2011, that India's vibrant services sector, which makes up nearly 58% of GDP, could hold the economy from further slippage.

A late surge in rainfall has pushed this season's rains 4% above the 50-year average. India is aiming for record foodgrain output of more than 245 million metric tonnes this crop year that began on July 1, as well as bumper cotton, sugarcane and other crops. A good monsoon season can typically boost rural farm incomes and have an impact on the wider economy through increased spending on consumer goods as well as reduced prices of food items.

Over the weekend, global economic policy makers, gathered in Washington for the annual meeting of the International Monetary Fund, tried to sound united and said Europe would do whatever is necessary to resolve the crisis. However, it remained unclear whether euro-zone nations can bridge their differences and respond quickly and effectively to the crisis.

Asian stocks rebound sharply on Tuesday after a pledge by European officials to resolve the region's debt problems helped soothe market sentiment. The key benchmark indices in China, Indonesia, Japan, Hong Kong, Taiwan, Singapore and South Korea were up by between 0.72% to 4.15%.

US markets surged on Monday amid hopes for coordinated action from Euro zone policymakers to contain the region's debt crisis. The Dow Jones industrial average shot up 272.38 points, or 2.5%, to 11,043.86. Nasdaq Composite added 1.35% or 33.46 points at 2516.69 and the Standard & Poor's 500 rose 2.33% or 26.52 points at 1162.95.

The Federal Reserve said at the end of a two-day policy meeting on 21 September 2011 that there are significant downside risks to the US economic outlook and also noted strain in global financial markets.