Market may gain on firm Asian stocks; food inflation data eyed

The market may edge higher in early trade on firm Asian stocks.Trading of S&P CNX Nifty futures on the Singapore stock exchange indicate a gain of 28 points at the opening bell. The stock market had remained closed on Wednesday, 26 January 2011, on account of Republic Day.

Among corporate results, HDFC Bank announces Q3 results today.



On the macro front, the government will unveil data on some wholesale price indices for the year through 15 January 2011 viz. the food price index, the primary articles index and the fuel price index at about 12:00 IST. The volatility may remain high as traders rollover positions in the derivatives segment from January 2011 series to February 2011 series ahead of the expiry of the near-month January 2011 contracts today, 27 January 2011.

As per provisional figures foreign funds bought shares worth Rs 272.99 crore and domestic funds sold shares worth Rs 169.68 crore on Tuesday, 25 January 2011.

Asian markets rose on Thursday, 27 January 2011 on upbeat US earnings. The key benchmark indices in China, Hong Kong, Indonesia, Japan, South Korea and Taiwan rose by between 0.22% to 0.61%. Singapore's Straits Times fell 0.14%.

In US stocks, the S&P 500 closed at a 29-month high on Wednesday led by gains in tech and commodity shares, as investors largely ignored the U.S. Federal Reserve's lukewarm economic assessment. The US stock market had little reaction to the Fed, which said high unemployment still justifies a $600 billion bond-buying program that has helped equities rally in the last few months. Strong earnings continue to support further gains in US stocks. In the latest economic data, new U.S. single-family home sales rose in December to their highest level in eight months.

Back home, to control surging inflation, the Reserve Bank of India (RBI) at its quarterly policy review on Tuesday, 25 January 2011, raised repo rate by 25 basis points to 6.5% and the reverse repo rate by 25 basis points to 5.5% with immediate effect. But, the central bank held the cash reserve ratio steady at 6%. Repo rate is the rate at which the RBI lends money to banks. Reverse repo is the rate at which RBI borrows funds from banks.

"As high food inflation persists, the prospect of it spilling over to the general inflation process is rapidly becoming a reality," Reserve Bank of India (RBI) Governor Duvvuri Subbarao said in the policy document. The RBI lifted its headline inflation projection for March 2011 to 7% from 5.5% previously. The central bank said inflation is likely to resume its moderating trend in the first quarter of 2011-12. The RBI stuck with its 8.5% GDP growth forecast for the current fiscal year, but with an upside bias.

The RBI extended the period for offering additional liquidity support to commercial lenders by more than two months in view of the existing cash crunch in the banking system. Banks can now access the additional liquidity support, equal to 1% of banks' net demand and time deposits, until 8 April 2011, as compared to 28 January 2011, when the facility was due to expire. The frictional liquidity shortage is expected to ease as government balances adjust to the expenditure schedule. However, banks need to focus on the underlying structural cause of liquidity tightness arising out of the gap between the credit and deposit growth rates, the RBI said.

The combined risks from inflation, the high current account deficit (CAD) and fiscal situation contribute to an increase in uncertainty about economic stability that consumers and investors will have to deal with, RBI said. To the extent that this deters consumption and investment decisions, growth may be impacted. While slower growth may contribute to some dampening of inflation and a narrowing of the CAD, it can also have significant impact on capital inflows, asset prices and fiscal consolidation, thereby aggravating some of the risks that have already been identified, it said.

It is important to emphasise that the role of monetary policy in the current inflationary situation is confined to containment and prevention of food and energy prices from spilling over into generalised inflation and anchoring inflation expectations, the central bank said. Unless meaningful output enhancing measures are taken, the risks of food inflation becoming entrenched loom large and threaten both the sustainability of the current growth momentum and the realisation of its benefits by a large number of households, the RBI said.

Another challenge to effective management of inflation by monetary policy arises from the persistence of a large fiscal deficit, the central bank said. While the government may succeed in raising receipts, both from high tax buoyancy and one-off sources, the real measure of fiscal consolidation lies in improving the quality of expenditure. If the government is able to commit more resources to capital expenditure, it will help deal with some of the bottlenecks that contribute to supply-side inflationary pressures. With reference to revenue expenditure, while large and diffused subsidies may contribute in the short term to keeping supply-side inflationary pressures in check, they may more than offset this benefit by adding to aggregate demand, the RBI policy statement said.

Capital flows, which so far have been broadly sufficient to finance the CAD, may be adversely affected, the RBI said. Faster than expected global recovery may enhance the attractiveness of investment opportunities in advanced economies, which may impact capital flows to India. This may increase the vulnerability of India's external sector. Hence, the composition of capital inflows needs to shift towards longer-term commitments such as foreign direct investment (FDI), the RBI said.