Market may extend Thursday's steep losses on weak Asian stocks

The market may extend Thursday (22 September 2011)'s 4.13% slump on weak Asian stocks. Trading of S&P CNX Nifty futures on the Singapore stock exchange indicates a fall of 73 points at the opening bell.

Fears of weak Q2 September 2011 corporate earnings and a rout in global stocks triggered by data showing a further slowdown in China's manufacturing sector and Federal Reserve's assessment that the US economy faces significant downside risks rattled Indian shares on Thursday, 22 September 2011. The BSE Sensex tanked 704 points or 4.13% to settle at 16,361.15, its lowest closing level since 26 August 2011.



Foreign institutional investors (FIIs) sold shares worth Rs 1305.55 crore on Thursday, 22 September 2011, as per provisional data from the stock exchanges.

Among corporate news, IT, exporter and importer companies' stocks will be in focus after the rupee suffered its biggest single session fall in nearly three years on Thursday after a grim outlook on the U.S. economy sent investors scrambling for safer currencies and government bonds. The partially convertible rupee ended at 49.57/58 to a dollar, 2.5% lower from its previous close, and its lowest since 15 May 2009. A weak rupee boosts revenue of IT firms in rupee terms as the sector derives a lion's share of revenue from exports.

Oil exploration firms, PSU OMCs and airline stocks eyed after oil prices tumbled more than 4 percent to six-week lows on Thursday, to hit a six-week low as the U.S. Federal Reserves weak economic outlook and disappointing China data stirred fears of a global recession and battered markets. U.S. crude was down $5.41 at $80.51. It was the biggest one-day drop in prices since 8 August 2011 with prices touching $79.66 a barrel during intraday activity. However, weak rupee will negate the impact of lower crude oil prices for PSU OMCs as the crude oil that that refineries process is either imported or priced on import-parity. The government has already freed pricing of petrol.

Metal stocks may decline as LMEX, a gauge of six metals traded on the London Metal Exchange dropped 6.43% on Thursday, 22 September 2011.

Maruti Suzuki India on Thursday reportedlly added 200 workers at its Manesar factory in the northern state of Haryana, increasing the total workforce to more than 1,300. The fresh hiring comes as labor unrest continues at the facility of the local unit of Suzuki Motor Corp. The unrest forced the auto maker to also start producing the Swift hatchback at its Gurgaon plant, also in Haryana, earlier this month to raise output and cut the waiting period for the car. Maruti, which introduced an upgraded version of the Swift in August, has orders for about 90,000 units of the car with a waiting period that has extended to more than four months due to the labor issues at Manesar. The current workforce includes supervisors, engineers and trained and experienced people brought in by the company, Maruti said, adding that it will further increase staff at Manesar in the coming days. Maruti halted operations at the plant on 29 August 2011 after it asked 950 workers to sign a "good conduct bond" before they could enter the factory. The move came after Maruti said it discovered "serious and deliberate" quality problems in cars made at the plant. It also suspended or dismissed 21 employees. Several workers have yet to sign the bond, leading the auto maker to hire new workers.

Nearly a quarter of top 100 companies have paid lower advance tax in Q2 September 2011, reflecting the slowdown in growth and pressure on margins because of rising input costs and higher interest rates. 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.

Meanwhile, Indian government's decision to defer the mega Rs 11000 crore follow-on public offer (FPO) of ONGC has helped ease concerns of the large issue sucking secondary market liquidity. As per the original plan, the FPO was scheduled to open for bidding on Tuesday, 20 September 2011.

Finance Minister Pranab Mukherjee early last week 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."

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.

Minister of commerce and industry Anand Sharma on Wednesday, 21 September 2011, said India has nearly completed discussions on a proposed India-US Bilateral Investment Treaty. Sharma, who is on a trip to the US, will meet US Trade Representative Ron Kirk to discuss other trade issues. In August 2009, India and the US started negotiating on the proposed treaty that seeks to provide binding legal rules regarding the treatment of investments between the two countries.

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 last week 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. In recent weeks, as a result of global risk aversion, the rupee has depreciated, which may have adverse implications for inflation, the RBI said. Most commodities imported by India, particularly oil, are denominated in dollars making these expensive for India.

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. The overall tone of the RBI's latest policy was softer than the previous policy announcement which was extremely hawkish.

Corporate margins in Q1 June 2011 moderated across several sectors compared to levels in Q4 March 2011. However, barring a few sectors, significant pass-through of rising input costs is still visible, RBI said.

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

The government last week 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 last week cleared the ambitious $90-billion Delhi-Mumbai industrial corridor. The Delihi-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 approved projects worth Rs 18000 crore last week, that include a housing project for para-military forces and a road project among others.

A memorandum of understanding (MoU) was signed last week 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 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 first advance estimates for the 2011-12 kharif season point to a record production of rice, oilseeds and cotton, while the output of pulses may decline. The monsoon rains were 29% above normal in the week to 21 September 2011, strengthening from 1% above average in the previous week, the weather office said on Thursday. The monsoon rains were 4% above average since the start of the June-September season, in line with the weather office's latest forecast of a normal monsoon in 2011, which means rains of 96 to 104% of a long-term average.

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 early this month. 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.

Asian stocks fell on Thursday driving a regional benchmark index toward its biggest weekly drop in almost three years, as concern intensified that policy makers worldwide may be running out of tools to avert another global economic recession.Key benchmark indices in China, Hong Kong, Indonesia, Taiwan, Japan, Singapore and South Korea shed by between 0.34% to 4.37%.

U.S. stocks plunged on Thursday, extending a selloff to four days, as policymakers' failure to arrest global economic stagnation sent markets spiraling downward. Weak data from China followed an unsettling outlook about the U.S. economy from the Federal Reserve on Wednesday in stoking recession fears. The previous session's losses were sparked after the Fed said it saw "significant downside risks" facing the economy.

Finance officials from the Group of 20 nations on Thursday pledged to preserve financial stability and said central banks stood ready to provide liquidity to banks as needed. "We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required," the G20 officials said in a communique after a dinner meeting to discuss the European debt crisis.