Nifty breaks below 200-DMA…Sensex loses point 17k

After staunchly defending the 200-DMA level for the past several sessions, the Nifty finally gave up the fight on Friday. The 50-share benchmark index broke below the crucial technical barrier after the rupee tumbled on mounting concerns about India’s deteriorating fundamentals. FII inflows, which had promised so much earlier in the year, have evaporated amid concerns over controversial tax proposals. The main indices and the broader indices lost 2-3% this week. Today they were down by ~2% while the rupee dropped by nearly 1% after a junior minister said that the Government was considering a review of the Double Taxation Avoidance Treaty (DTAT) with Mauritius to boost revenues. It may be recalled that last week, Standard & Poor's cut the outlook on India's ratings, citing the downturn in the economy, deteriorating external account, high budget deficit and policy impasse. The rupee fell further to hit a new four-month low against the US dollar, as domestic oil refiners continued to buy the greenback amid high crude prices. Rising trade and current account deficits, besides dwindling FII inflows are also weighing on the partially-convertible Indian currency. FII flows have turned weak over the past few weeks, as overseas investors have been put off by the Government's proposed new regulations on capital gains and Vodafone-like tax disputes. The rupee dropped below 53 this week for the first time since January 5 after government data showed that exports fell in March - first drop since Sept. 2009. According to certain media reports, the Reserve Bank of India (RBI) intervened in the currency market on Wednesday and Thursday, but failed to arrest the slide in the rupee. The BSE Sensex ended at 16,831, down 320 points or 1.87% over the previous close. It had earlier touched a day’s low of 16,776 and a day’s high of 17,121. It opened at 17,066. The NSE Nifty settled at 5,086, down 101 points or ~2% over the previous close. It earlier touched a day’s low of 5,070 and a day’s peak of 5,177. It opened at 5,166. The BSE Small-Cap index was down ~1.8% while the BSE Mid-Cap index lost ~2.1%. The INDIA VIX on the NSE jumped sharply. It was up 9.7% to close at 21.12 after being as high as 21.45. It had closed at 19.25 yesterday. The market breadth was decisively weak on the BSE, with 2,069 shares declining and 745 shares advancing. Sectoral indices were a sea of red barring the Pharma index, which ended up 0.2%. Capital Goods led the pack of laggards and closed down 3.7%. Other notable losing sectoral indices were Bankex, Metals, PSU, Realty, Power, Consumer Durables, Auto and Oil & Gas. Top declining stocks on the Sensex and the Nifty were Bank of Baroda, PNB, BHEL, Axis Bank, SBI, Hero MotoCorp, L&T, Sesa Goa, Reliance Infra and Cairn India. Notable gainers were few on both the indices. Cipla, Sun Pharma, and Wipro managed to avert a knock on the chin. The Nifty has broken out of the trading range of 5150-5350 after cracking below the 200 DMA level of 5120. This trading range had prevailed since the last three months. A move below 5050 could spark further selling and the Nifty might drop towards 4950. The rupee too is close to its all time low of 54.30. We maintain a cautious outlook on the Indian markets and continue to hold a negative bias in the near term. Next week will be important for India as the Parliament takes a final call on the Finance Bill, including the controversial GAAR issue. IIP data is due on May 11. Adding to the list of domestic problems are renewed worries over the eurozone debt crisis and data showing slowdown in the US. Even the Chinese data has not been too encouraging. Risk aversion continues to be high given the fragility of the global economic recovery. For India, the problems have been compounded by a Government that is happy with status quo following a spate of controversies and scams. The RBI has done its bit to shore up sentiment, but its good work has been more than offset by Centre’s fiscal profligacy and lack of reforms. There is hope that some meaningful steps may be taken once the Budget session of parliament is over. However, it would be foolhardy to expect much given the dismal track record of UPA on reforms. So, keep your fingers crossed. There could be more downside in the coming days, while the upside will be capped as long as the Government doesn’t show some gumption. Till then FII flows and economic statistics will continue to determine the mood of the markets. Minister of State for Finance S.S. Palanimanickam told the parliament today that even after holding seven rounds of bilateral talks, the Indian Government has not received a favourable response from Mauritius to address the tax evasion issue. "There was unwillingness on the part of Mauritius to cooperate in addressing this problem. Consistent efforts are being made by the Indian government to find mutually acceptable solutions for addressing India's concerns," he said. Seven rounds of discussions have taken place so far, Palanimanickam said in a reply to queries from lawmakers in the Lok Sabha. However, no fresh dates have been finalised for the next round of talks on the issue, he said. An India-Mauritius joint working panel was set up in 2006 to put in place adequate safeguards for preventing the misuse of the DTAT between the two countries. Government officials have said that the country is losing more than US$600mn a year in revenue because of the tax treaty with Mauritius. Palanimanickam said today that 39.5% of the total FDI into India between April 2000 and February 2012 have been channeled through Mauritius. Separately, data showed that the combined output of manufacturing and service industries further deteriorated last month across the debt-strapped Eurozone, reinforcing growing fear that the region is on the brink of another recession. The composite purchasing managers' index (PMI), a measure of private-sector activity based on surveys of 4,500 firms, slumped to 46.7 in April from 49.1 in March, according to Markit Economics. Economists were expecting no change from the preliminary April reading of 47.4. On Thursday, the ECB left rates unchanged and President Mario Draghi has refused to give any hints on further policy easing. World markets will also be nervous two days before election runoff in France and polls in Greece over the weekend. The US markets have been resilient in the face of encouraging earnings. However, some of the recent economic statistics point to loss of momentum in the world's largest economy. All eyes will be on monthly jobs data expected later today. Cipla closed up 2.5% at Rs. 325.20 after brokerage CLSA upgraded the stock to "outperform" from "underperform", maintaining the 1-year price target at Rs. 360. Finolex Cables advanced 5.6% to Rs. 35.60 after the company’s 4Q profit climbed to Rs. 445.6mn from Rs. 186.8m in the same period a year earlier. IL&FS Investment rose 0.2% and closed at Rs. 27.50 after the company reported 4Q profit at Rs. 169.7mn versus Rs. 145.6mn in the same period a year ago, up 16.5% on year. After rising earlier, McNally Bharat Engineering ended down 0.7% at Rs. 89.50. The stock had risen earlier on securing a Rs.1.77bn rupee order from NTPC and Unitech Hi-Tech. After rising to Rs. 104.50, Mount Everest Mineral Water closed down 5.6% at Rs. 94.10 in a weak market. The stock had risen after Tata Global Beverages TGB bought a 4.98% stake in the company. Tata Global Beverages also ended down 2.7% at Rs. 114.45 after rising earlier. IT companies Wipro, MindTree, Persistent Systems moved up 0.6-3.3% after BNP Paribas upgraded the stock to ‘Buy’ from ‘Reduce’. However, Mindtree slipped 0.5% in a weak market. IRB Infrastructure Developers extended losses for a third day and finished at Rs. 128.75 down 14%. The fall was triggered on news that CMD Virendra Mhaiskar and other executives would be questioned and would undergo a polygraph test with regard to a murder case by the Central Bureau of Investigation. Kingfisher Airlines fell 4.5% to Rs. 13.70 on reports that the carrier’s pilots may once again go on strike. Recently, the staff of the troubled airline went on strike over non-payment of salaries. JSW Energy fell 3.9% to Rs. 47 after Deutsche Bank cut the price target of the stock by 20% to Rs. 45 while keeping its rating unchanged at ‘Sell’. NIIT Technologies slumped 6.2% to Rs. 249.10 after the company’s net profit in the fourth quarter ended March fell 19.8% on quarter to Rs. 301.7mn. Corporation Bank declined 3.7% to Rs. 385.30 after net profit increased slightly in Q4 by 1.71% on year to Rs. 3.51bn. HCL Technologies ended down 0.2% to Rs. 512.85 after 1.44% of the company’s equity was transacted in a block deal on the BSE.