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Weekly Market View: Trapped in a range

The market is about to correct the strong rally we have witnessed but not by much. The upside would be capped at a Sensex of 18,300

The domestic market started the week with a huge gain. The positive sentiment in the market continued throughout the week, taking cues from the positive global market. The Sensex and the Nifty both ended the week 3% gains.

The top Sensex gainers this week included DLF up 8%, Larsen & Toubro (L&T), Reliance Communications (RCom) and Sterlite Industries up 7% each and Wipro up 6%. Bharti Airtel ended up as the lone loser, down 4%, while Maruti Suzuki, ACC, Cipla and Tata Steel ended flat.

In the sectoral space, the IT index gained 5% and capital goods was up 4% while the healthcare index ended flat in the reporting week.

It is expected that India will be able to reduce the fiscal deficit to 4.5% of its gross domestic product (GDP) by March 2011 on revenue earnings from third-generation (3G) spectrum. The sale of 3G mobile phone licences and broadband access will bring in $23 billion, which will help the government reduce its Rs4.57 trillion borrowing for the fiscal year. India had projected a budget deficit of 5.5% for the fiscal year that ends in March 2011, down from a 16-year high of 6.9% of GDP in the last fiscal year.

The wholesale price index (WPI) rose an annual 10.16% in May, driven by higher food and fuel prices, government data showed on Monday. This has increased the possibility of the Reserve Bank of India (RBI) raising interest rates at its meeting in July.

The government has approved stake sale in Coal India Ltd (CIL) and Hindustan Copper Ltd (HCL) that could be worth up to $3.7 billion. In CIL, 10% stake will be sold and 20% stake in HCL will be offloaded. The stake sales are part of a broader divestment plan by the Indian government to offload minority holdings in 60 state firms in the coming years.

The RBI said that rates are not indicative of the high growth in the economy and should be curbed by controlling interest rates. Planning Commission deputy chairman Montek Singh Ahluwalia said that weekly movements in India's inflation will not have any impact on reforms to free fuel prices.

The government (after market hours) on Tuesday, 15th June, proposed the imposition of capital gains tax on all stock market transactions by Indians and overseas funds as part of the proposed changes in tax laws. As per the second draft of the Direct Tax Code (DTC), the securities transaction tax (STT) will stay and rates will be calibrated. In the first draft of the DTC unveiled last year, the government had proposed to scrap the STT. The DTC has proposed taxing gains from investments in the stock market and also equity-linked mutual fund units at the applicable rate of taxation. The DTC has also proposed some taxes on income of foreign funds, treating all incomes from their investments in the stock market in India as capital gains.

India's annual monsoon rains in the week to 16th June were 8% below normal, the Indian Meteorological Department (IMD) said. Rainfall was 32.5mm during the week against a normal 35.2mm, the Met office said.

C Rangarajan, chairman of the prime minister's Economic Advisory Council said that inflation has gone beyond the comfortable level and the Reserve Bank of India (RBI) should control it. Double-digit inflation cannot be only because of increased food prices, as the manufacturing sector is also contributing to the inflation.

Exports in May were up 35% over the year ago period, trade secretary Rahul Khullar said. Imports have been up 30% over the year ago period. 

RBI governor D Subbarao said that the inflation is getting more generalised with the demand side pressure building up in the economy. The RBI will take a calibrated exit from the loose monetary policy.

In the US, a release by Department of Labor on Thursday showed number of Americans filing first- time claims for unemployment benefits rose 12,000 to 472,000 in the week ending 12 June 2010. The Federal Reserve Bank of Philadelphia said that its manufacturing index was down to 8 in June 2010 from 21.4 in the prior month.


RBI favours deregulation of interest rate on savings accounts

"Deregulation of interest rates, including savings rates, is an important way forward for reforms. The base rate system that will come into affect from 1st July is also an important reform," RBI governor D Subbarao said

Reserve Bank of India (RBI) governor D Subbarao today said the central bank is in favour of deregulating interest rates on savings accounts as part of financial sector reforms, reports PTI.

"Deregulation of interest rates, including savings rates, is an important way forward for reforms. The base rate system that will come into affect from 1st July is also an important reform," he said in Hyderabad.

The concerns expressed by banks on the issue should be debated, he said.

Currently, the savings rate is fixed at 3.5% and is being calculated on daily basis from 1st April.

On Thursday, RBI deputy governor K C Chakrabarty had said, "We are in favour of deregulating all interest rates including savings rate."

"We have initiated a debate in the last policy... The deduction is very clear, clear in favour of deregulating all interest rates, including savings banks. But the decision will be taken, when to do that, after having adequate debate on the issue," Mr Chakrabarty had said.

However, bankers felt that any such move would lead to wide variation in the market.

Mr Chakrabarty had said, "This is a highly competitive market. Prices do not vary much. But what will be the rate, what customers will get, will depend on market conditions."

On inflation, Mr Subbarao said the RBI will review the inflation targets at its next policy meeting on 27th July.

"Earlier, we expected the inflation rate to come down to 5.5% by March, 2011. We projected this number in our earlier meeting. We will revisit that number in the July policy meeting," Subbarao told reporters.

Food price inflation for week ended 5th June was at 16.12% compared to 16.74% in the previous week.

Inflation has been hovering at double digits for the past several weeks.

However, he said despite this fact, the growth numbers are quite encouraging and investment is picking up.


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