Market likely to open sideways; inflation data eyed

The market is likely to see a flat-to negative start on Thursday on mixed Asian markets. Trading of S&P CNX Nifty futures on the Singapore stock exchange indicates a fall of 8.50 points at the opening bell. The market is likely to see high volatility today, 24 November 2011 as traders roll over positions in futures & options (F&O) segment from the near-month November 2011 series to December 2011 series.

The government will today, 24 November 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 12 November 2011.



Key benchmark indices fell for the 9th time in the past ten trading sessions on Wednesday, 23 November 2011 to reach 2-year closing lows as data showing heavy selling by foreign funds recently hit sentiment adversely. The BSE Sensex tumbled 365.45 points or 2.27% to settle at 15,699.97, its lowest closing level since 3 November 2009.

Data showing heavy selling by foreign institutional investors (FIIs) recently weighed on sentiment. FIIs sold shares worth Rs 1,186.42 crore on Wednesday, 23 November 2011, as per the provisional data from the stock exchanges. Their outflow totaled Rs 4847.59 crore in seven trading session from 15 to 23 November 2011, as per data from the stock exchanges.

Junior finance minister S.S. Palanimanickam on Wednesday said the government has no proposal to lower the securities transaction tax (STT). There has been a speculation that the government will reduce STT in Union Budget 2012-2013 in a bid to revive sagging volumes on the bourses. Palanimanickam said in a written reply to Rajya Sabha that the securities transaction tax receipts had declined by around 18% to Rs 2960 crore during the first six months in the current fiscal year from a year ago period.

Corporate earnings have been weak. The combined net profit of a total of 3,852 companies declined 36.1% to Rs 67428 crore on 20.5% growth in sales to Rs 1142360 crore in Q2 September 2011 over Q2 September 2010.

Over the past few weeks, the government has taken some steps to encourage foreign investment. It raised the amount of government bonds that foreigners can hold and the amount of corporate debt they can hold by $5 billion each, to $15 billion and $20 billion respectively. The Union Cabinet also recently approved a pension overhaul that is expected to have a provision added allowing foreign pension-management companies to hold up to 26% of Indian joint ventures, from zero today.

The Reserve Bank of India (RBI) on Tuesday, 22 November 2011, eased rules for overseas investors in infrastructure debt funds, allowing foreign buyers to purchase bonds issued by such funds. Foreign investors can now buy either local or foreign currency bonds issued by infrastructure debt funds, provided they hold them for three years, the Reserve Bank of India said in a statement. Under broad guidelines for infrastructure funds issued in June this year, a fund may be set up either as a trust or a company. Overseas investors were previously allowed to invest in infrastructure debt funds that were set up as a trust.

The central bank also said that foreign investors other than non-resident Indians can't collectively invest more than $10 billion in such funds. The limit of $10 billion is within the $25 billion cap on overseas investment in infrastructure sector bonds, or infrastructure finance firms.

The RBI on Wednesday, 23 November 2011, eased rules on currency swap hedges by companies, removing a cap on the net supply of foreign currency a bank can add to the market as a result of such swaps. The move will help banks sell more currency swaps to companies with overseas debt, to help them cope with the volatile currency market.

Among key financial Bills pending before Parliament in the current winter session is the Pension Fund Regulatory and Development Authority (PFRDA) Bill 2011, which will provide the regulatory authority statutory powers, including that to take punitive action on violations. The interim PFRDA authority, at present, is not backed by a statutory mandate.

Among other bills, the Judicial Standards and Accountability Bill is the cornerstone of the judicial reforms much touted by the government. Its intent is to bring about disclosure of assets for all high court and Supreme Court judges and lay down a 'code of conduct'. Thereby, judges can be probed over corruption allegations as that would be a violation of their code of conduct.

Among other important Bills lined up is the National Advisory Council-backed National Food Security Bill. Issues such as the extent of coverage of such food security, the amount of subsidy and the role of the PDS in such a system will be the aspects likely to be debated. The sports ministry-led National Sports Development Bill and the Nuclear Regulatory Authority Bill are among the 23 new Bills listed for introduction.

The Reserve Bank of India (RBI) recently announced its first government bond buyback under its open-market-operations program this year, in a move aimed at easing liquidity in the cash-strapped banking system. The central bank said late on Tuesday, 22 November 2011, that the buyback operations will include the old 10-year benchmark bond, the 7.80% 2021. The other papers in the buyback on Thursday are: 7.99% 2017 bond, 7.83% 2018 bond and the 8.13% 2022 bond.

Monetary policy has a limited role in curbing food price pressures in India but such action may still be warranted if high food inflation persists, the central bank governor said Tuesday, 22 November 2011. "A lasting solution to food price pressures lies in a supply response that raises agricultural production and productivity, improves supply chain management and sets the right incentive framework for both producers and consumers," D Subbarao said, according to a copy of his speech at a conference released by the Reserve Bank of India.

Subbarao said that the supply measures taken to meet the growing demand for protein-rich foods have been inadequate. Food prices have been hovering at their highest levels in several months due to sustained demand from the growing middle class that is increasingly consuming more of high-protein diets like milk, fish and meats, offsetting price decline in other commodities.

RBI announced a 25 basis points hike in its key policy rate viz. the repo rate to 8.5% after half-yearly review of the monetary policy on 25 October 2011. The central bank cut its GDP growth forecast for the current fiscal year through March 2012 to 7.6% from 8% earlier. But it retained its March-end inflation projection of 7%. RBI said the projected inflation trajectory indicates that the inflation rate will begin falling in December 2011 (January 2012 release) and then continue down a steady path to 7% by March 2012. It is expected to moderate further in the first half of 2012-13. This reflects a combination of commodity price movements and the cumulative impact of monetary tightening. Further, moderating inflation rates are likely to impact expectations favourably.

Emerging markets such as India must take measures to boost long-term foreign direct investment to blunt volatility in exchange rates, and any capital control measures must be selective and temporary, a senior executive of the Asian Development Bank said on 14 November 2011. While capital flows and exchange rates are likely to be volatile in the short-term amid ongoing euro-zone debt concerns, India must focus on improving its investment climate by providing better infrastructure, putting in place a coherent manufacturing policy and developing financial markets, Managing Director General Rajat M. Nag said on the sidelines of the India Economic Summit.

Moody's Investor Services warned on Monday, 21 November 2011, that rising French borrowing costs and an uncertain outlook posed an ongoing threat for the country's AAA credit rating. French government bond yields ticked higher on Monday.

Asian shares were trading mixed today, 24 November 2011. Key benchmark indices in Indonesia, China and Japan were down by between 0.67% to 1.38%. Key benchmark indices in Taiwan, Singapore, Hong Kong and South Korea rose by between 0.34% to 0.94%.

US stocks edged lower on Wednesday after slower growth of Chinese economic data indicated slowing global economy and coupled with European worries. The Dow Jones industrial average sank 236.17 points, or 2.05%, to 11,257.55 at the close. The Standard & Poor's 500 Index dropped 26.25 points, or 2.21%, to 1,161.79. The Nasdaq Composite Index lost 61.20 points, or 2.43%, to 2,460.08.

HSBC's preliminary China manufacturing survey fell to a 32-month low in November 2011, with the reading signaling the sector is now contracting. The Purchasing Managers Index printed at 48 on a 100 point scale, reversing from a mildly expansionary reading of 51 in October. The index provides a non-government view on how China's economy is faring.

HSBC economist Hongbin Qu said the data implied that industrial production will moderate to annualized growth rates of 11% to 12% in the coming months amid cooling domestic and external demand. However, he said there was little in the data to suggest a major contraction was underway in China.

Fitch Ratings said late on Monday, 21 November 2011, that it would conclude a review of US sovereign credit ratings by the end of November, in light of the congressional super committee's failure to reach a bipartisan deal to cut the federal debt. Fitch cited its previous statement in August that "failure by the super committee to reach agreement would likely result in a negative rating action -- most likely a revision of the rating outlook to negative, which would indicate a greater than 50% chance of a downgrade over a two-year horizon." It said a one-notch downgrade was possible but "less likely."

S&P reaffirmed it will keep its US rating at AA+ after stripping the government of its top AAA grade on 5 August 2011. Moody's retained its AAA rating on US with a negative outlook.