Stocks
Downside Risk Remains

Indian markets started the week on a positive note due to strong Indian economic expansion in the September quarter. The Sensex gained 470 points over the week. While we would not be surprised if the market continues to rally, we think its time to be cautious. On Monday 30 November 2009 the Sensex put on 294 points from the Friday 27 November’s close ending the day at 16,926 while the Nifty gained 91 points to end at 5,033. As per data released by the government, India’s gross domestic product (GDP) grew by 7.9% during July-September 2009 compared with 7.1% in the corresponding year-ago quarter, shattering forecasts as stimulus measures boosted demand and manufacturing activity surged. The economy had registered 6.1% growth in the first quarter. The recovery was led by a 9.2% growth in manufacturing, while mining and construction activities expanded by 9.5% and 6.5%, respectively. But agriculture continued to be a major drag with a mere 0.9% growth.

According to Montek Singh Ahluwalia, deputy chairman, Planning Commission, economic growth forecast for the year to March 2010 may have to be revised upwards as the GDP figures showed a faster expansion in the September quarter. He said inflation was “not a serious concern” as of now and conventional monetary policy was unlikely to be effective in tackling rising food prices.

Subir Gokarn, the RBI’s new deputy governor, said the economic recovery was gaining strength but the December quarter numbers could be lower than the 7.9% annual growth recorded in the September quarter. He also said food-price inflation was a matter of concern and authorities would keep a watch on capital inflows.  On Tuesday 1 December 2009 the Sensex closed at 17,198 gaining 272 points from the previous day’s close, while the Nifty closed at 5,122, up 89 points.

As per the data released by the government exports fell 6.6% to $13.19 billion in October 2009 over October 2008, while imports dropped 15% from a year earlier to $22 billion. The trade deficit shrunk to $8.80 billion in October 2009 from $11.74 billion a year earlier. Exports for April-October 2009, the first seven months of the 2009-10 fiscal year were down 26% at $91.05 billion from the same period in the previous year.

The finance minister said buoyancy in the government’s revenue seen earlier may not continue till 2011-2012. Mr Mukherjee also said that the government will not sell over 10% in listed State-run firms at this stage and will time its stake sale to get maximum value. The HSBC Markit Purchasing Managers’ Index, based on a survey of 500 companies, fell to 53 in November 2009 from 54.5 in October 2009. According to the survey, India’s manufacturing activity expanded for the eighth straight month in November 2009 but was at its weakest pace since March 2009 due to a slowdown in growth of output, new business and employment.

On Wednesday 2 December 2009 the Sensex closed at 17,170, declining 28 points from the previous day’s close and the Nifty closed at 5,123; up one point mainly on profit-booking. Meanwhile, the government has reportedly drawn up a list of 25 state firms for stake sales which include Nuclear Power Corporation of India, National Bank for Agriculture and Rural Development, Exim Bank of India, Punjab & Sind Bank, Indian Railways Finance Corporation and National Housing Bank. As per reports, other companies planning initial public offers (IPOs) include SBI Caps and SBI Fund Management, both subsidiaries of government-controlled State Bank of India.

Many of these IPOs could hit the market after the follow-on public offers of 5% each in NTPC and Rural Electrification Corporation, and a 10% stake sale in unlisted Satluj Jal Vidyut Nigam are completed in the current financial year, the report added.

On Thursday 3 December 2009 the Sensex declined 175 points from the day’s high of 17,361, ending the day at 17,186—up 16 points from the previous day’s close—while the Nifty closed at 5,132, up 8 points on concerns over a hike in the cash reserve ratio by the central bank to suck out excess liquidity from the banking system.

As per a survey, the business activity among Indian services companies expanded in November 2009 but at a slower pace than in the previous month, with broad growth across all sectors. The HSBC Markit Business Activity Index, based on a survey of 400 firms, fell to 55.20 in November after having climbed to a 13-month-high of 56.78 in October.

According to D Subbarao, governor, Reserve bank of India (RBI), the central bank’s main function is to maintain price stability. He also said that the central bank would revisit its growth target of 6% with an upward bias at its 27 January 2010 monetary policy review.

Usha Thorat, deputy governor, RBI, said that the central bank was likely to revise upwards the economic growth forecast for the current fiscal year to March when it reviews policy in January. She also said that money supply in the current year has been exhibiting slower growth. India’s exit from its loose monetary policy will be a challenge and managing the crisis was easier than managing the recovery now, she said. On Friday 4 December 2009 the Sensex declined 84 points from Thursdays close at 17,102 while the Nifty closed 23 points lower at 5,109. According to an RBI survey of professional forecasters, wholesale price inflation is expected to average 5.8% in fiscal year 2010-11.
— Swapnil Suvarna
 

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Food inflation may prompt RBI to reduce liquidity: Rangarajan

In the coming days, both fiscal and monetary accommodative policies may have to be withdrawn gradually amid high fiscal deficit and rising inflation, particularly food inflation

The Reserve Bank of India (RBI) may start sucking out money from the system to combat inflation, but this depends on how food prices move this month, the prime minister's Economic Advisory Council (PMEAC) said on Friday.

"The RBI could take action after watching the behaviour of prices in December to restrain liquidity. The RBI might start by reducing the liquidity in the system," PMEAC chairman C Rangarajan told reporters on the sidelines of a FICCI seminar.

Food inflation rose to 17.47% for the week ended 21st November against 15.58% in the previous week, while overall WPI inflation doubled to 1.34% in October compared to 0.5% in the previous month. The RBI is scheduled to come out with its quarterly review of the monetary policy in January.

Separately, RBI governor D Subbarao said that the central bank would revisit the growth inflation projection figures in January. He, however, side-stepped the question of possible intervention to contain soaring prices.

Mr Subbarao's statement on 'revisiting' the growth projection indicates possible upward revision in the light of considerable rise in gross domestic production (GDP) growth to 7.9% during the July-September quarter. 

The RBI governor, however, declined to give an idea on whether the central bank would intervene to check rising prices of various articles, particularly food items.

"I cannot answer now whether RBI needs to intervene or when it will intervene. If we take a decision, we will let you all know about it," the RBI governor said after a meeting with Orissa chief minister Naveen Patnaik in Bhubaneswar.

The PMEAC chairman said that though food inflation must be primarily handled through supply management, there is a role for monetary policy as well. "In a period of scarcity, if the money supply growth is very strong, it will also aggravate food inflation," he said.

The RBI has projected that the wholesale price inflation would rise to 6.5% by end of this fiscal.

Mr Rangarajan added that in the coming days, both fiscal and monetary accommodative policies may have to be withdrawn gradually amid high fiscal deficit and rising inflation, particularly food inflation.
— Yogesh Sapkale
 

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UK Treasury pays for crisis advice

According to figures uncovered by the National Audit Office the Treasury paid £107m of taxpayer cash to City firms for their assistance over the past two years. Although it expects the banks to pay back £100m of the fees, it admits that, so far, not a penny has been reimbursed. The NAO indicated that the Treasury may not have secured the best price for the advice, and could have wasted money with overly generous contracts.

 

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