Market may slide on weak Asian stocks; food inflation data eyed

The market is likely to open on a weak note tracking lower Asian stocks. Trading of S&P CNX Nifty futures on the Singapore stock exchange indicates a fall of 74 points at the opening bell. Fears of weak Q2 September 2011 corporate earnings are also likely to weigh on sentiment. Nearly a quarter of top 100 companies have paid lower advance tax in Q2 September 2011.

On the flip side, the 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.



On the macro front, the government will today, 22 September 2011, unveil data on some wholesale price indices viz. the food price index, the primary articles index and the fuel price index for the year through 10 September 2011.

Euro-zone debt worries pulled Indian stocks lower on Wednesday, 21 September 2011. The BSE Sensex lost 34.13 points or 0.2% to settle at 17,065.15, its lowest closing level since 19 September 2011. Foreign institutional investors (FIIs) bought shares worth Rs 243.45 crore on Wednesday, 21 September 2011, as per provisional data from the stock exchanges.

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.

ICICI Bank and the US-based Oppenheimer Holdings Inc. have agreed to form a non-financial partnership to tap business opportunities in the two countries, the companies said Wednesday. ICICI Securities and Oppenheimer & Co. Inc. have formed a strategic alliance covering a wide range of securities activities including equity and debt capital markets services, advisory services, private equity transactions, and wealth management, the companies said in a press statement. ICICI Securities recently announced a similar pact with the UK-based financial advisory group Collins Stewart Hawkpoint PLC to promote joint access to each others' core markets.

Tata Consultancy Services (TCS) said after market hours on Wednesday that TCS BaNCS Core Banking Release 12 has been launched at the annual flagship event for Banking and Capital Markets in Toronto.

Maruti Suzuki India, India's largest car maker by sales, said Wednesday it will resume production of the A-Star small car and the SX4 hatchback within a week at its factory at Manesar in Haryana. Production of the cars at Manesar was stopped 29 August 2011 after Maruti asked 950 regular workers belonging to the unrecognized Maruti Suzuki Employees Union to sign a "good conduct bond" before they could enter the factory. The auto maker said it asked the workers to sign the bond after it discovered "serious and deliberate" quality problems in cars made at the plant. It also suspended or dismissed 21 employees.

Maruti was so far focusing on normalizing production of the Swift hatchback, one of its largest selling models, to cut long waiting period. The company also started producing the Swift at its Gurgaon factory, also in Haryana state, to meet demand. It is relying on supervisors, engineers and temporary workers to continue production of Swift at Manesar. Maruti also deployed some workers from its Gurgaon factory at Manesar.

Maruti said it hasn't held any fresh talks with the striking workers. Talks between Maruti's management and the workers had failed late Sunday after the employees stuck to the demand that the company take back their dismissed colleagues.

Coal India reportedly plans to ask the Indonesian government to allocate it a coal mine, and also seek approval to set up a joint venture with a state-run mining company there.

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.

On the macro front, 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. Inflation remains high, generalised and much above the comfort zone of the Reserve Bank of India, it said. The central bank said that Friday (16 September 2011)'s repo rate hike is expected to reinforce the impact of past policy actions to contain inflation and anchor inflationary expectations. As monetary policy operates with a lag, the cumulative impact of policy actions should now be increasingly felt in further moderation in demand and reversal of the inflation trajectory towards the later part of 2011-12, RBI said.

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.

Although India's exports have performed extremely well in the recent period, this trend is unlikely to be sustained in the face of weakening global demand, RBI said. This, combined with the slowing down of domestic demand, to which the monetary policy stance is also contributing, suggests that risks to the growth projection for 2011-12 made in the July 2011 monetary policy review are on the downside, RBI said.

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.

The central government's fiscal imbalances widened during April-July of 2011 reflecting, primarily, the impact of decline in revenue receipts coupled with pressures from non-plan revenue expenditures on account of higher petroleum and fertiliser subsidies. Fiscal deficit at 55.4% of the budget estimates in the first four months of the current fiscal was significantly higher than that of 42.5% during the corresponding period last year (when adjusted for the more than budgeted spectrum proceeds).

Reacting to the RBI's latest rate hike, Navneet Munot, Chief Investment Office (CIO), SBI Mutual Fund said, "The lag effect of past actions and global environment would moderate the domestic demand and inflation trajectory going forward, in our view. Our sense is that RBI is likely to take a pause after today's rate action. This should be viewed positively by bond and equity markets. Sentiments in equity markets should improve on evident signs of peaking of rate cycle. Markets would closely watch global developments and movement in commodity prices".

Bank of America Merrill Lynch said in a research note after the RBI's latest hike that it continues to believe that the Indian rate cycle is peaking with growth likely to slip below 7.5% during the second half of 2011 and inflation set to come off to 7% in Q1 2012. The RBI will pause after a final 25 basis points (bps) policy rate hike on 25 October 2011 and cut rates by 100 bps from April 2012 onwards, it said.

Reacting to RBI's latest rate hike, Dhawal Dalal, Senior Vice President and Head Fixed Income, DSP Black Rock Mutual Fund, said the RBI is likely to increase the repo rate by another 25 bps at its next policy review on 25 October 2011. "We expect the RBI to pay a lot more attention to the inflation trajectory going forward with focus on core inflation. The RBI has not been unduly worried about the prospective slowdown in the GDP numbers and is confident of the resilient nature of economy", Dalal said.

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.

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 shares fell sharply on Thursday, 22 September 2011, with investors reacting badly to the US Federal Reserve's new policy measures and view on the prospects for economic growth. Key benchmark indices in China, Hong Kong, Indonesia, Taiwan, Japan, Singapore and South Korea shed by between 1.04% to 4.25%.

Stocks in Hong Kong and Shanghai, also came under pressure from data showing a further slowdown for China's manufacturing sector. HSBC's preliminary China Manufacturing Purchasing Managers' index, or flash PMI, fell to a two-month low of 49.4 in September, easing from 49.9 in August, the bank said Thursday, 22 September 2011.

As expected, the Fed on Wednesday, 21 September 2011, announced a plan to long-dated Treasury securities and sell the same amount of securities with a shorter maturities, but also cited "significant downside risks to the economic outlook," sending US stocks into a tailspin on Wednesday.