Indian markets remained highly volatile during the week following index heavyweight Bharti Airtel’s massive slump on reports that the company is in talks to buy the African assets of Kuwaiti telecom player Zain for $10.70 billion and on concerns that rising food inflation may force the Indian central bank to push up rates. China’s surprise move to restrict bank lending to cool its surging economy weighed on market sentiments as worries rose about the impact of monetary tightening on global growth. On the last trading day of the week, Indian markets along with other Asian markets slumped after an increase in the US Federal Reserve discount rate spurred concerns that the economic bounce-back will slow down as stimulus programs are being unwound. At the end of the week, the Sensex gained only 39 points.

Next week, we expect Indian markets to move sideways as traders roll over positions from February derivatives contracts to March contracts ahead of the Budget. The market will possibly take a direction after the Budget.

On Monday, 15 February 2010, the Sensex declined 114 points from Thursday’s (11th February) close, ending the day at 16,038, while the Nifty declined 25 points to close at 4,802. During trading hours, government data showed that the wholesale price index (WPI) rose 8.56% in January 2010 from a year earlier, driven by higher food prices. The rise was driven by a 17.4% jump in food prices, which rose on weak monsoon rains and flooding from last year. Inflation in manufacturing picked up to 6.55% from about 5% in December 2009, a sign that inflationary pressures were spreading to other sectors of the economy.

Meanwhile, the government revised upwards WPI inflation for November 2009 to 5.55% from 4.78% earlier.

D Subbarao, Reserve Bank of India (RBI) governor, said over the weekend that large government borrowing influences monetary policy. The government completed its market borrowing of Rs4.51 lakh crore ($97 billion) for the current fiscal year to end-March early this month and the RBI expects its gross market borrowing next year to be slightly higher than this year. As per data released on Friday, 12 February 2010, industrial output grew 16.8% in December from a year earlier, up from a revised annual rise of 11.8% in November. The RBI has already started to unwind stimulus, and is widely expected to tighten rates at its April meeting.

EPFR Global, the Massachusetts-based research firm that tracks global fund flows, said that investors took $2.90 billion out of all emerging-market equity funds in the first week of February 2010, the highest weekly decline since 9 July 2008. EPFR further added that global funds in particular were hurt as investors pulled out $1.76 billion, a 60-week high. On Tuesday, 16 February 2010, the Sensex shot up 188 points from the previous day’s close to 16,227 while the Nifty closed at 4,856, up 54 points.

The government amended rules for foreign currency convertible bonds (FCCBs) to allow issuers to revise their conversion price, a move aimed at reducing price uncertainty in a volatile equity market. The change would give issuers a window of six months to adjust the conversion price of their bonds to the higher of either the two weeks’ average or the six months’ average of the issuing company’s stock. The decision unveiled by the finance ministry applies to companies that issued FCCBs before 27 November 2008.

As per reports, Ashok Chawla, finance secretary, said that the government has resolved the issues related to 3G wireless spectrum auction but it is not sure if it would happen before the end of the current fiscal year ending 31 March 2010. Mr Subbarao said that the central bank cannot target inflation, as transmission of monetary policy is muted in the country. He added that it was difficult for monetary policy to attack supply-side driven inflation. On Wednesday, 17 February 2010, the Sensex shot up 202 points to 16,429 from the previous day’s close, while the Nifty closed at 4,914, up 58 points.

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