Market may extend recent gains on firm Asian stocks; RBI policy review in focus

The market may extend two day gains on firm Asian stocks. Trading of S&P CNX Nifty futures on the Singapore stock exchange indicates a gain of 21.50 points at the opening bell.

Eleven out of twelve economists polled by Capital Market expect a 25 basis points (bps) hike in repo rate, the key short-term policy interest, from the Reserve Bank of India at its mid-quarter policy review today, 16 September 2011. The Reserve Bank of India (RBI) has said that a change in its anti-inflationary monetary stance will be motivated by signs of a sustainable downturn in inflation. The Reserve Bank of India has raised its key policy rate 11 times in the past 18 month to tame high inflation. Interest rate sensitive auto, realty and banking stocks will be in action ahead of monetary policy.



PSU OMCs and auto stocks to be watched as state-run oil firms will raise petrol prices by nearly 5% from today, a move that eases their subsidy burden but adds near-term pressure to stubbornly high inflation in Asia's third-largest economy. Hindustan Petroleum Corp, Bharat Petroleum Corp and Indian Oil Corp, which dominate fuel retailing in India, said they will increase their petrol prices by Rs 3.14 per litre.

Tata Motors, India's biggest auto maker by revenue, said Thursday its global vehicle sales in August rose 3% from a year earlier to 87,459 units. he company said sales at its U.K.-based luxury car unit, Jaguar Land Rover, jumped 31% to 21,242 vehicles during the month. Sales of Land Rover sport-utility vehicles surged 43% to 17,833 units, but Jaguar sedan sales fell 10% to 3,409 autos. Global sales of all trucks and buses rose 17% to 48,023 units, the company said.

The advance tax for the September quarter paid by top 100 Mumbai-based companies has reportedly recorded a moderate growth of 5 per cent at about Rs 17,224 crore (Rs 16,366 crore) as most banks and oil companies reported a flat growth in their tax payout.

Easing of overseas borrowing rules by the government which will help Indian firms tap cheaper cash abroad and easing euro-zone debt worries helped Indian shares scaled one-week closing high on Thursday, 15 September 2011. The BSE Sensex jumped 166.94 points or 1% to settle at 16,876.54, its highest closing level since 8 September 2011. From a recent low of 16,467.44 on Tuesday, 13 September 2011, the Sensex has jumped 409.10 points or 2.48% in two trading sessions. Foreign institutional investors (FIIs) bought shares worth Rs 136.55 crore on Thursday, 15 September 2011, as per provisional figures.

Economic Affairs Secretary R. Gopalan on Thursday, 15 September 2011, said that the government has 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, Mr. Gopalan added. 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.

A recent India investor survey report prepared by J P Morgan Asset Management-ValueNotes expects benchmark Sensex to trade between 20,000 and 22,000 by end of this year. According to the report, the investment sentiment is affected by concerns such as recession, frequent hikes in interest rates and volatility in the domestic investment environment. Despite witnessing a 4.2-point decline from the last quarter, the 'Retail Investor Confidence Index' ranks the highest at 137.5 points. Retail investors' activity in mutual funds has improved 11% since the last quarter, the survey said. The survey was carried out from 22 July to 4 August 2011.

The survey also shows that investors are becoming cautious as preserving capital emerges as a popular investment strategy among retail investors (40%). However, 40% of investors, in comparison to 57% in March 2011, are expected to turn "somewhat aggressive" about their investment strategy over the coming six months.

An indicator of risk appetite from global financial major Bank of America Merrill Lynch has fallen to levels last seen in March 2009, according to a global fund manager survey from the firm. However, fund managers remain overweight on emerging markets, according to an emerging market fund manager survey from Bank of America Merrill Lynch also issued on Tuesday, 13 September 2011.

The proportion of fund managers who are bullish on emerging markets has risen from 27% last month to 30% now, said the report authored by Michael Hartnett, Kate Moore and Brian Leung. However, if the banking crisis in Europe spirals out of control, emerging market equities will be vulnerable to further sell-offs, the survey report said. Global fund managers have reduced the level of their underweight positions on India, according to the survey.

Finance Minister Pranab Mukherjee on Tuesday, 13 September 2011, 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."

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 Monday, 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.

On the macro front, the recent steep slide in the rupee against the dollar has added to concerns of high inflation as India imports majority of its crude oil requirements. Lower rupee will raise cost of imports which could worsen the current account deficit.

The food inflation dipped marginally to 9.47% for the week ended 3 September 2011 year-on-year, coming down from the 9.55% registered in the previous week, according to official data released Thursday. The primary articles index, which has a 20.12% weight in the wholesale price index, rose by 13.04% in the week under review as compared to 13.34% rise in the previous week, according to data released by the commerce and industry ministry. The index for fuel and power rose 13.01% as against 12.55% in the previous week.

Inflation as measured by the wholesale price index (WPI) accelerated to 9.78% in August 2011 from the previous month's provisional reading of 9.22%, data released by the government on Wednesday, 14 September 2011, showed. The inflation reading exceeded market expectations. The government also revised upwards the inflation rate for June 2011 to 9.51% from a provisional 9.44% rise reported earlier.

Planning Commission deputy chairman Montek Singh Ahluwalia on Monday, 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 said at the 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.

Prolonged rainfall in the latter part of the season has helped ease concerns that this year's monsoon might drop below the long-term average after a brief lull in July, when the country usually receives a third of its monsoon rains. The monsoon was 3% above average till 7 September 2011, as per the latest data from Indian Meteorological Department (IMD). Most parts of the country received average to above-average rainfall this year, but the season was marked by both lulls and periods of intense rainfall in western and eastern regions.

While overall rainfall plays a key part in determining farm output, the timing and distribution of rains are also important to ensure a good crop. The unusual pattern of this year's rains may delay harvesting, affecting the yield from key summer-sown crops such as rice, oilseeds, sugarcane and cotton. Rice acreage as of 2 September 2011 was up 12% from last year at 35.75 million hectares.

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. But food prices may not necessarily fall if delayed and excess rains in some regions affect crop yields.

Moody's Investors Services affirmed its Baa3 rating for India's foreign currency government debt and its Ba1 rating for local currency debt in an annual credit analysis released last week. The ratings firm assigned a positive outlook to India's rupee-denominated bonds, saying it will consider a unified Baa3 rating for all bonds if India improves its fiscal position and its commitment to strengthening the domestic market. The outlook for foreign-currency debt is stable.

The report was upbeat about India's ability to weather a global economic downturn. "While it is not immune to an international growth slowdown, the strength of domestic demand and the diversity of the economy provides a buffer against a deceleration in globally exposed sectors," the report said. It noted that India's foreign currency reserves equal four times its foreign debt obligations.

A debt-to-GDP ratio of 71% is cause for concern, as interest on this debt eats up 25% of India's revenues annually. However, "Moody's expects that continued GDP growth and incremental fiscal consolidation efforts will continue to lower the government debt/GDP ratio," the report said.

India's merchandise exports grew 44.2% in August 2011 from a year earlier, totaling $24.3 billion, sharply slowing from the previous month's pace, Commerce Secretary Rahul Khullar said last week. Imports in the just-ended month rose 41.8% from a year earlier to $38.4 billion, which widened the trade deficit to $14.1 billion from $11.1 billion in July.

Asian stocks posted early gains on Friday, as the relatively stable euro ahead of a European finance ministers meeting reflected hopes for a big policy move to fight a debt crisis. The key benchmark indices in China, Hong Kong, Indonesia, Singapore, Japan, South Korea and Taiwan rose by between 0.39% to 2.49%.

U.S. stocks rose for a fourth day on Thursday as coordinated central bank action calmed fears that Europe's financial sector was headed for a credit freeze due to the region's sovereign debt crisis. European Central Bank announced plans, in coordination with other major central banks, to make it easier for euro zone institutions to borrow dollars.

New weekly U.S. jobless claims hit their highest level since late June and a gauge of New York state factory activity contracted in September. Another report showed manufacturing activity in the Mid-Atlantic region contracted for a second month in a row.

The Federal Open Market Committee (FOMC) is scheduled to undertake a two-day policy review on US interest rates on 20 and 21 September 2011. It remains to be seen if the Federal Reserve announces further measures to revive the US economy. Among the options that the Fed may consider include another round of quantitative easing or QE3, the Operation Twist which is the purchase of long-term verses selling short-term bonds so as to lower long-term yields, and lowering the rate on excess reserves held by banks at the Fed in order to increase the monetary aggregates.