Markets tumble as uncertainties over inflation, crude and political affairs loom

Indian benchmarks once again settled in the red zone on the last trading day of the week as hefty profit booking by funds and retail investors continued for the second straight day after the RBI hiked its key policy rates to curb inflation on Thursday. Sentiments remained subdued as investors feared that more rate hikes are on cards as RBI's tone was hawkish as it battles spiraling inflationary pressures which threaten to derail the robust growth of Indian economy. The gloomy reports from the political front too did no good to the local sentiments as the opposition demanded resignation of Indian Prime Minister following a wikileaks cable showing bribes had been given by the ruling UPA government members for votes during a no confidence motion after an Indo-US nuclear treaty. While in the global space, sanguine cues from the Asian and European markets went largely unnoticed as investors factored in the spike in international crude oil prices which surged in the session after a vote by the United Nations Security Council (UNSC) authorizing the imposition of a no-fly zone over the Libya. The NSE's 50-share broadly followed index Nifty, breached the crucial 5,400 support level while Bombay Stock Exchange's Sensitive Index, Sensex infringed the psychological 18,000 mark after shaving off over two hundred fifty points. The broader markets traded with some resilience though and finished with relatively smaller losses thereby outshining their larger peers. The BSE's midcap index went home with losses of 0.43% while the smallcap index shed 0.78% points. On the sectoral front, the BSE oil and gas index tumbled 2.67% as heavy position squaring in oil and gas stocks led by bellwether Reliance Industries which fell 3.71% after reports that it's output from gas field in the KG-D6 basin were projected to remain 13% lower. While oil marketer BPCL was another laggard in the oil and gas space as it plummeted 2.20%. The rate sensitive Auto pack continued to lose steam for yet another day as it succumbed to the heavy selling pressure to end with 2.01% losses after stocks of companies like Tata Motors and Mahindra & Mahindra dragged the index by 2.17% and 3.31% respectively. There remained no sector that could go home with gains but individual stocks like Tata Steel and Tata Power managed to finish above the neutral line, however marginally. 

On the global front, majority of Asian equity indices finished the positive terrain led by Japanese benchmark which garnered over two and half a percent points after the G7 industrial nations agreed for a joint currency intervention to stop the yen's rise and support Japan's economy which is trapped amid the aggravating nuclear catastrophe. The European markets too mirrored the optimistic Asian cues as France's CAC, Germany's DAX and Britain's FTSE traded in the green zone with around half a percent gains. On the other hand, the screen trading for US index futures also indicated that the Dow could open with gains of around half a percent point.

Earlier on Dalal Street, the benchmark ricocheted by around 100 points in the opening trade, with finance and other sector stocks rising on the back of supportive cues from overnight US markets which surged around one and half a percent on the back of the slew of good economic reports that helped to put aside the fear of Japanese crisis. However, the frontline indices immediately erased all the opening gains and treaded on a southbound journey thereafter since unpleasant reports related to the index heavyweight RIL's lower than estimated gas production from its KG Basin block hit headlines. Sentiments were also dampened after the opposition raised questions on Congress, which is already burdened by corruption charges, culpability after wikileaks cables revelation. The bourses touched intraday lows in the dying hours of session as they infringed crucial support levels to eventually settle with losses of around one and half a percent. The markets registered high volumes of over Rs 1.41 lakh crore while the turnover for NSE F&O segment too remained on the higher side compared to Thursday at over Rs 1.28 lakh crore. Market breadth remained negative as there were 1048 shares on the gaining side against 1801 shares on the losing side while 120 shares remained unchanged.

Finally, the BSE Sensex plunged by 271.06 points or 1.49% to settle at 17878.81 while the S&P CNX Nifty fell by 72.95 points or 1.34% to end at 5373.70

The BSE Sensex touched a high and a low of 18,259.61 and 17,849.53, respectively. The BSE Mid-cap and Small-cap indices declined 0.43% and 0.78%, respectively.

Tata Steel up 0.26% and Tata Power up 0.17% were the only gainers on the Sensex.

On the flip side, Reliance Infrastructure down 3.87%, RIL down 3.71%, Mahindra & Mahindra down 3.31%, HDFC down 2.57% and Hero Honda down 2.35% were the major losers on the index.

The Reserve Bank of India (RBI), which hiked its policy rates for eighth time on Thursday in the current fiscal has while expressed comfort with current account deficit (CAD) scenario, it has at the same time raised some doubts on the ability of the government to keep the fiscal deficit at the budgeted levels due to potential of surge in subsidies.

The government has pegged the deficit for next fiscal at 4.6%, bettering the recommendation of 4.8% given by the Thirteenth Finance Commission (TFC). However, the central bank said that high global crude prices were quite likely to put pressure on subsidy outgo which can result in significant increase in deficit over the course of the fiscal.

'While the budgeted level of fiscal deficit for 2011-12 gives some comfort on the demand front, a potential increase in the subsidies on petroleum products and fertilizers as a result of high crude prices could put pressure on expenditure,' said the Reserve Bank in its last policy review for current financial year released on Thursday.

Not only the central bank's but the assessment of most experts at this point in time is that the government's picture, at least with current global commodity scenario and domestic inflation tendencies, is perhaps a little on the rosy side. International oil prices continue to hover above $110 per barrel, and the factors driving them are largely political in the Middle East and North African regions and therefore could last for some more time.

The government has kept the subsidy outgo for the current fiscal at lower levels compared with the actual (revised) figures for the last fiscal. This can only happen if crude prices come down to around $70-75 a barrel soon and stay broadly in that range for better part of the year. On the other hand, if crude prices continue to remain on the higher side, say close to $100 a barrel, subsidy outgo of the government can easily go higher by Rs 40,000 - RS 50,000 crore.

Overall therefore, the budgeted level of fiscal deficit at 4.6% looks a little unrealistic in terms of the rising oil prices as well as high domestic inflation. How much upside is possible to this number however is hard to say for now as oil prices, the biggest driver of deficit at the moment, seem to be highly volatile. Only by middle of the fiscal when usually the first supplementary budget is out, one can gauge some indications of what kind of additional spending that the government is calling for over and above what's in the budget.

Oil&Gas down 2.67%, Auto down 2.01%, Realty down 1.65%, Consumer Durables down 1.48% and IT down 1.36% were the major losers in the BSE sectoral space. There were the no gainers in the BSE sectoral space.

As rate domestic cost of borrowing begins to rise amidst continued monetary tightening by the central bank, India Inc is increasingly looking to overseas sources of funds. In the month of January, Indian companies raised over $2.7 billion through External Commercial Borrowings (ECBs) and Foreign Currency Convertible Bonds, showed the data compiled by the Reserve Bank of India (RBI).

Out of the total amount, around $1.93 billion were raised through the automatic route, which does not require the approval of either the central bank of government. A total of 35 companies availed foreign borrowings under automatic route. The remaining sum of around $773 million was raised by four companies under the approval route.

The biggest funding was availed by the government controlled Hindustan Petroleum Corporation (HPCL) that raised $400 million through the ECBs for modernizing its plants in India. Another major borrowing came from the construction and Infrastructure company SP Jammu Udhampur Highway that brought in $ 350 million via ECBs for various road projects being undertaken by it.

Indian companies are allowed to raise up to $500 million from overseas sources in a financial year under the automatic route for specified purposes. In case the objective for raising loans is not covered explicitly under the automatic route, the central bank takes a decision under the approval route. Often when the domestic rate cycle is on the uphill journey, as is the case presently, the foreign borrowings of India Inc increase as foreign funds become cheaper in many cases.

The S&P CNX Nifty touched a high and a low of 5,483.05and 5,366.40 respectively.

The top gainers on the Nifty were Ambuja Cement up 0.53%, Tata Steel up 0.48% and ITC up 0.39%.

The top losers on the index were reliance infra down 4.32%, M&M down 4.01%, Reliance down 3.92%, Reliance power down 3.40% and BPCL down 2.99%.

In an indication that further deregulation of fuel prices was not on the government's cards, the Prime Minister's Economic Advisory Council (PMEAC) today said that the government would have to wait for inflationary pressure to calm down before taking any such step. The under-recoveries in the fuel have increased and deregulation of say diesel at this stage would mean a hike of over Rs 10 a litre, which is obviously not feasible either politically or economically.

Global crude prices have firmed up substantially off late due to the disturbances in middle-East and may continue to remain over $100 a barrel for some more time. The PMEAC said in this wake that it would be difficult to deregulate diesel at one go as it would require substantial increase in prices of the fuel and thereby will further push inflation. It rather proposed that diesel prices should be increased in a staggered manner over a period of time to minimize the overall impact on poor people.

The government had earlier deregulated the price of petrol last year to bring it in line with the global prices while hiked the administered prices of diesel, domestic LPG and kerosene. The move was aimed at cutting the under-recoveries in the oil sector which have been threatening to reach unsustainable levels over last few years. While diesel prices were then hiked by Rs 2, its full deregulation was postponed in wake of high inflation.

European markets were trading in green on Friday. France's CAC 40 gained 0.77%, Germany's DAX increased 0.35% and Britain's FTSE 100 was up by 0.21%.

All the Asian equity indices barring Straits Times finished the trade in the positive terrain on the last trading day of the week after the G7 rich nations agreed for a joint currency intervention to stop the yen's rise and support Japan's economy amid a nuclear crisis after a record earthquake. Chinese Shanghai rose about half a percent, led by index heavyweights viz PetroChina Co, after it posted a record quarterly profit and broad gains in the property sector. Moreover, Taiwan stocks surged more than one percent, with Wintek and other Apple Inc suppliers taking lead in a rebound from worries over the earthquake and nuclear crisis in Japan.

Asian Indices	Last Trade	Change in Points	Change in %
Shanghai Composite	2,909.40	12.10	0.42
Hang Seng	22,300.23	15.80	0.07
Jakarta Composite	3,494.07	9.86	0.28
KLSE Composite	1,503.89	11.80	0.79
Nikkei 225	9,206.75	244.08	2.72
Straits Times	2,935.78	-7.10	-0.24
Seoul Composite	1,981.13	22.10	1.13
Taiwan Weighted	8,394.75	112.06	1.35

 

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