Market may extend gains on global recovery

The market may edge higher today tracking gains in Asian and US stocks. But some concern may emerge following the government’s latest move to tighten external commercial borrowings (ECB) which is likely to raise borrowing costs for Indian companies. Sensex had risen 30 points yesterday, 7 August 2007, tracking recovery in global markets.

As per provisional data, FIIs sold shares worth Rs 326 crore yesterday. Domestic institutional investors bought shares worth a net Rs 116 crore on that day. FIIs had sold shares worth a massive Rs 1166.60 crore on Monday, 6 August 2007, the day when Sensex had lost 235 points due to setback in global markets.

The government on Tuesday, 7 August 2007, put stiff restrictions on overseas borrowings, a measure sought by the Reserve Bank of India (RBI) to enable it to check the rupee’s sharp appreciation. External commercial borrowings (ECBs) above $20 million have now been allowed only for foreign currency expenditure for permissible end-uses and are required to be parked abroad.

As a result, interest costs for companies might jump by 75-100 basis points as ECBs were usually at lower interest rates than domestic borrowings, reports suggest. Indian companies had raised a total of $24 billion of ECBs during 2006-07 against the government’s internal target of $22 billion.

Asian stock markets rose on Wednesday, 8 August 2007 after the US Federal Reserve's positive outlook for the US economy, Asia’s top export market, helped soothe concerns about a global credit squeeze. Key benchmark indices in Hong Kong, Japan, South Korea, Singapore and Taiwan were up by between 0.7% to 2.5%.

US stocks rose on Tuesday, 7 August 2007, following the Fed’s outlook on the economy. The Dow Jones industrial average rose 35.52 points, or 0.26%, to end at 13,504.30. The Standard & Poor's 500 Index gained 9.04 points, or 0.62%, to finish at 1,476.71. The Nasdaq Composite Index advanced 14.27 points, or 0.56%, to close at 2,561.60.

The Fed, which left interest rates unchanged at a policy meeting, buoyed the market by reassuring investors that problems in mortgage lending and corporate finance would not drag on the broader economy. The Fed on Tuesday, 7 August 2007, left its benchmark interest rate unchanged at 5.25% in a widely expected move and said while tightening credit conditions had increased downside risks to the US economy, inflation was still its main concern.