Decline in food inflation fails to fuel markets

Local equity markets, though have pared some of the losses, continues to trade choppy notwithstanding the decline in food inflation, which stood at 13.07% for the week ended January 29, 2011 on the back of considerable softening in vegetable and dip in pulses prices compared with 17.05% in the previous week. Global investors' sentiment continues to remain somber. While all the Asian markets with an exception of Shanghai Composite, which was up by 1.58%, are trading in the red, US index futures are also trading with significant losses. Back home, on the sectoral front, Realty, consumer durables, technology and metal companies' shares were under pressure while fast moving consumer goods, power, auto and healthcare sector were witnessing some buying interest. The broader markets seem to be in a bear phase and the BSE Mid-cap and Small-cap indices are trading with loss of 1.26% and 2.01%, respectively. The market breadth on the BSE was in favour of declines in the ratio of 2011:693 while 66 scrips remained unchanged. Meanwhile, Agriculture Minister Sharad Pawar is expecting a bumper production of foodgrains and pulses this year and has even called for lifting of the ban on export of certain crop products like rice, sugar and onion, which were being sold on very high prices till recently. This news may provide some support to the markets which are trading around the seven month low level.

The BSE Sensex dropped 175.22 points or 1% at 17,417.55. The index touched a high and a low of 17,636.88 and 17,362.59, respectively.

The BSE Mid-cap and Small-cap indices sank 1.26% and 2.01%, respectively.

In the BSE sectoral space Realty down 4.20%, Consumer Durables (CD) down 2.30%, TECk down 1.80%, Information Technology (IT) down 1.39% and Metal down 1.32% were the major losers.

On the flip side, Fast Moving Consumer Goods (FMCG) up 0.53%, Power up 0.35%, Auto up 0.31% and Healthcare (HC) up 0.25% were the only gainers in BSE sectoral space.

Meanwhile, nearly all the telecom operators have rejected the latest recommendations of the telecom regulatory authority of India (TRAI) which requires them to pay a heavy fee for the spectrum held by them over and above the 6.2 MHz in each circle.

The incumbent GSM operators are saying that the recommendations by the telecom regulator on 2G spectrum prices amounted to changing the goal posts in the middle of the game, and will have serious implications for the communications industry. Further, even the new operators seem to be unhappy saying it would legalize the excess spectrum held by older players at a much lower cost. This is despite the fact that new operators had got telecom licenses in 2008 at 2001 prices themselves.

According to leading GSM players, the recommendations do not rectify the completely illogical difference in the treatment of spectrum given to GSM operators and that to dual-technology operators. Vodafone Essar said in response to the TRAI recommendations in an emailed release, "Although the latter have between 10% and 40% more spectrum than Vodafone, the new TRAI recommendations suggest that they will pay insignificant amounts as one-time spectrum fees".

The TRAI had constituted a committee to calculate the value of 2G spectrum in the 1,800 MHz band at 2010 prices. The committee submitted its report on Monday and the same was released by the TRAI on Wednesday. The report used economic modeling to arrive at current prices of spectrum and concluded that the price of 2G spectrum up to 6.2 MHz should be at 53% of the 3G auction price. However, it contends that the efficiency of 2G spectrum beyond 6.2 MHz is higher than the start-up spectrum given to 3G operators. Therefore, the price of excess spectrum beyond 6.2 MHz should be 136% of the 3G auction price.

Following the report, the price of each MHz of spectrum beyond the 6.2 MHz will be Rs 4,571.87 crore. The recommendations will be applicable with effect from April 1, 2010 on pro-rata basis depending upon the number of years left for a particular license to expire. If the report is accepted by the government, these will result in a hit of around Rs 16,000 crore to existing operators, including over Rs 6,000 crore to BSNL, close to Rs 4,000 crore to Bharti, around Rs 1,743 crore to Vodafone and Rs 70 crore to Reliance Communications.

The top gainers on the Sensex were Rel Infra up 9.18%, ITC up 2.21%, JP Associates up 2.07%, Hero Honda up 1.82% and Tata Motors up 1.36%.

Bharti Airtel down 4.02%, SBI down 3.67%, BHEL down 2.91%, Cipla down 2.41% and HDFC down 2.23% were the top losers on the index.

The Chamber of Indian Industries (CII) on Thursday urged the government to provide higher tax incentives on agricultural activities in the forthcoming General Budget in order to encourage greater private investment and adoption of new technologies in the sector.

'CII has recommended encouraging private sector participation through various tax measures in agriculture,' the CII said in a statement. It added that the additional tax incentives should be given on spending on new technologies and inputs like better fertilizers and seeds etc that will improve the productivity in the long run and help improve overall harvest.

The industry body said that in order to give a boost to the farm sector, the government should incentivize best practices soil testing, residue analysis and diagnostics etc. This will not only boost productivity and help improve availability of farm goods but will also result in rise in farm income and hence support India's domestic consumption story. The demand comes at a time when inflation in India has been high for over a year and is looking increasingly resistant to traditional measures. The RBI had in its last policy review on January 25 hiked its short term lending rate by 25 basis points (bps) implementing seventh rate hike in the current financial year so far. However, with the food inflation so far giving thumbs down to both the strong Kharif harvest and rapid monetary tightening by the central bank, options with policy makers are fast shrinking.

The union government has seen a lot of criticism for ignoring the farm sector since the financial deregulation started in early 1990s. Capital formation in the farm sector, as a percentage of gross domestic product (GDP) came down significantly over the next couple of decades and has resulted in slowdown in productivity improvement or even stagnation in case of some crops. Giving greater incentives to the farm sector to push capital formation will improve productivity of farm operations and help improve overall output.

The S&P CNX Nifty fell 38.10 points or 0.73% to 5215.45. The index touched a high and a low of 5272.50 and 5196.80, respectively. 

The top gainers of the Nifty were Rel Infra up 9.56%, SAIL up 4.44%, Sun Pharma up 2.72%, JP Associates up 2.29% and Ranbaxy up 2.28%.

The top losers of the index were Bharti Airtel down 3.88%, SBI down 3.49%, BHEL down 2.66%, Tata Steel down 2.63% and Cipla down 2.44%.

All the Asian markets with an exception of Shanghai Composite, which was up by 1.58%, were trading in the red with deep cuts; Hang Seng declined 1.20%, Jakarta Composite shed 1.87%, KLSE Composite trimmed 1.06%, Nikkei 225 tanked by 0.11%, Straits Times tumbled 1.36%, Seoul Composite plummeted 1.81% and Taiwan Weighted dropped 1.89%.

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