Lack of participation from institutional investors is putting a cap on the gains
The domestic market is likely to open soft as markets across the world reeled lower on continued concerns about the pace the economic growth. US stocks ended in the red for the fourth day as the Federal Reserve’s quantitative easing, also known as QE2 comes to an end this month. Dismal economic data from the US last week continued to keep the Asian bourses lower in early trade on Tuesday. The SGX Nifty was down 41.50 points to 5,495 compared to its previous close of 5,536.50.
The market, which opened lower on concerns about the pace of the global recovery yesterday, pushed itself into the positive in post-noon trade, on support from the IT, healthcare and banking sectors.
The Sensex opened 32 points lower at 18,344 and the Nifty was down 13 points at 5,504. The market was range-bound in negative territory, weighed down by auto, power and technology stocks and absence of cues from Asia, as most bourses were closed for local holidays. The indices fell to their intra-day low in the mid-morning session with the Sensex touching 18,258 and the Nifty falling to 5,480.
However, bargain hunting after two days of decline lifted the indices into the green. The indices touched their intra-day highs in the last hour with the Nifty at 5,543, adding 26 points to its previous close and the Sensex 83 points higher at 18,459.
The market closed near the day's high, snapping a two-day decline. At the end of trade, the Sensex added 44 points at 18,420 and the Nifty finished 15 points up at 5,532.
Although the market opened weak and the Nifty hit an intra-day low well below its first resistance of 5,550, it managed to make an intra-day high near that level. The Nifty should be able to maintain itself above this level to still see an uptrend. The Nifty should be in a position to sustain itself above the level of 5,435 to avoid the downtrend. The movement between 5,435 and 5,550 will be a range-bound movement.
US stocks settled lower for the fourth consecutive day as the Fed’s QE2 comes to an end at the end of June Financial stocks were lower on rumours that Washington is contemplating increasing reserve requirements for lenders. Bank of America and Citigroup plunged 3.9% each. Wells Fargo & Co, the largest US home lender, declined 2.2% after Rochdale Securities’ Richard Bove cut his recommendation on the stock. Energy shares were also among the hardest-hit sectors, with Chevron Corp falling 1.3% to $9.68 as the biggest drag on the Dow.
The Dow declined 61.15 points (0.50%) to 12,090.11. The S&P 500 fell 13.99 points (1.08%) to 1,286.17 and the Nasdaq Composite was down 30.22 points (1.11%) to 2,702.56.
Markets in Asia were down in early trade on Tuesday on concerns about the slowdown in economic growth in the US and lingering debt issues in Europe. The Nikkei was flat as short-covering in utilities and bargain-hunting offset fears of a slowdown in the US economy. Shares in Seoul were down, weighed down by the technology and crude refining companies.
The Hang Seng declined 0.61%, the Jakarta Composite fell 0.35%, the KLSE Composite was down 0.13%, the Straits Times fell by 0.31%, the Seoul Composite tanked 0.76% and the Taiwan Weighted was 0.49% lower. On the other hand, the Shanghai Composite added 0.11% and the Nikkei 225 was up 0.03%.
Oil fell on Monday on expectations that OPEC will raise production targets this week and concerns about the economic outlook. Brent crude for July delivery fell $1.36 to settle at $114.48 a barrel, the weakest close in nearly two weeks while US July crude fell $1.21 to settle at $99.01 a barrel, also the lowest close in two weeks.
Back home, the Reserve Bank of India (RBI) expects the new marginal standing facility (MSF) to be tested during the tight liquidity period next week when banks and corporates pay their quarterly advance tax.
The apex bank had introduced the MSF while unveiling the annual monetary policy, stating that banks can borrow up to 1% of their total deposits from the RBI under the MSF facility at a rate, which is 100 basis points higher than the short-term lending (repo) rate.
The government managed to contain fiscal deficit, the gap between overall expenditure and receipts, at 4.7% of GDP during 2010-11, much lower than the revised estimate of 5.1%. For the current fiscal, it proposes to bring down the fiscal deficit to 4.6% of the GDP
New Delhi: The finance ministry today said it would endeavour to keep the fiscal deficit for the current fiscal at 4.6% of the gross domestic product (GDP) despite an anticipated slowdown in revenue collection, reports PTI.
"For the finance minister (containing) the fiscal deficit is very important. He (Pranab Mukherjee) says the fiscal deficit should be contained at 4.6%. So we will all work towards that," Department of Economic Affairs secretary R Gopalan said.
He was speaking on the sidelines of a conference organised by the National Institute of Public Finance and Policy here.
Asked about the government finances, he said the growth rate of revenue is likely to be less this fiscal as compared to what was achieved in 2010-11.
"Our assessment or estimation of the growth in revenue this year is less than that of the last fiscal... As regards to expenditure, we will try and maintain (it) at the level which we had provided in the budget," he said.
The government managed to contain fiscal deficit, the gap between overall expenditure and receipts, at 4.7% of GDP during 2010-11, much lower than the revised estimate of 5.1%.
For the current fiscal, the government proposes to bring down the fiscal deficit to 4.6% of the GDP.
The deficit stood at Rs3,69,043 crore for the fiscal ended March 2011, constituting 4.69% of the GDP.
The Centre's fiscal deficit was lower by around Rs32,000 crore over the revised estimates for 2010-11 on the back of better revenue realisation and expenditure compression.
Total fiscal deficit during the year was 92% of the revised estimate of Rs4,00,998 crore, showing an improvement on the fiscal front.
The Centre also cut its revenue deficit, an excess of the current expenditure over the current receipts, to 3.11% of GDP against the projected 3.4%. It was lower than even 3.2% projection as per the road map given by the 13th Finance Commission.
In 2011-12, the government is looking at bringing it down to around 3%.
Total revenue receipt during 2010-11 was Rs7,94,277 crore (as per provisional figures), up almost 39% from the actuals of Rs5,72,811 crore in the previous fiscal.
The government had revised the revenue collection figure for 2010-11 at Rs7,83,833 crore, Rs10,444 crore more than the revised estimate.
In his Budget speech in February, finance minister Pranab Mukherjee pegged the revenue collection for the current fiscal at Rs7,89,892 crore.
The EGoM meeting that was scheduled on Thursday to decide on increasing diesel and LPG prices has been cancelled. Has the government deferred a decision on the hike to avoid fuelling anger that was set off by the midnight crackdown on anti-corruption protest led by Baba Ramdev?
The Empowered Group of Ministers (EGoM) was scheduled to meet on Thursday this week, to decide on subsidies provided to the oil marketing companies (OMCs) and the hike in the price of diesel and liquefied petroleum gas (LPG) used for cooking. However, finance minister Pranab Mukherjee's office has sent out a letter to various ministries cancelling the meeting on subsidies and pricing.
Although this is not the first time that a meeting of the EGoM has been cancelled, the change of mind appears significant in the wake of the incidents at the weekend over the anti-corruption protest being led by Baba Ramdev. This also raises questions about whether the government may have been aware of the midnight action and the likely after-effects, and therefore cancelled the meeting that could have escalated matters.
The crackdown by police to disrupt the hunger protest has sparked off an uproar and it is possible that the government may have chosen to step back on the fuel hike in the heated atmosphere.
Except on one occasion in 2008 and another in 2009, fuel prices have been hiked regularly, on higher crude oil prices globally. It is said in Marathi that earning 1-2 paisa on a rupee is business and earning more than that is 'corruption'. In the case of fuel prices, the government levies taxes as high as 50%. On the one hand government wants to continue with subsidies on diesel, LPG and kerosene, and on the other hand it will not reform or cut duties on fuel.
Last month, Indian Oil Corporation (IOC), the largest oil marketing company in the country, expressed its desire to raise prices of petrol by another Rs1.50 a litre, following a Rs5 per litre hike just three weeks ago. According to RS Butola, chairman, IOC, the company's under-recovery stands at Rs12.64 a litre for diesel, Rs25.85 a litre for kerosene and Rs380.50 on an LPG cylinder.
About 80% of the domestic consumption of petroleum products in the country is met through imports, which is why global prices have a decisive influence on domestic prices. In the crude refining industry, crude oil constitutes about 90% of the total cost.
Over the years, the fuel price hike was limited to petrol and OMCs continued to suffer losses on other fuels. The reason is simple. Petrol constitutes just 1.1% weight in the wholesale price index (WPI) compared with a weightage of 4.7% for diesel. LPG and kerosene have a weightage of 0.9% and 0.7%, respectively; but these are very sensitive items, so no government wants to meddle with these prices. In addition, since petrol prices were de-regulated last year, there is no need for OMCs to get ministerial approval to increase the prices. (see image below)
OMCs incur under-recoveries of Rs479 crore a day on sale of diesel, kerosene sold through the public distribution system (PDS) and LPG. The government says that in order to insulate the common man from the impact of the rise in international oil prices, it continues to modulate the prices of these three sensitive petroleum products. The government provides fiscal subsidy under the 'PDS kerosene and domestic LPG subsidy scheme 2002'. The scheme was subsequently extended beyond 31 March 2010 to 31 March 2014.
The retail selling price of sensitive petroleum products, namely diesel, PDS kerosene and domestic LPG, are calculated by taking into account (a) the price paid to the refinery on trade parity/import parity basis, (b) inland freight up to the market, (c) marketing margin, (d) dealers' commission, (e) excise duty, (f) value-added tax, (VAT) and local levies.
For example, petrol prices in Delhi are at Rs63.37 per litre. This includes an excise duty of Rs14.79, sales tax/VAT of Rs10.32, customs duty of Rs2.74 and dealer commission of Rs1.22, that is a total of Rs29.07 on every litre is towards taxes and duties. This means that over 45% of the Rs63.37 for each litre is going to fill government coffers!
During April-September 2010, OMCs incurred under-recoveries of Rs31,367 crore. The Union government compensated Rs13,000 crore as cash assistance and Rs10,456 crore as upstream assistance by way of price discount on crude oil and products. However, during the six months to September 2010, the OMC had to bear under-recoveries of Rs7,911 crore.
Whenever basic prices of petroleum products are increased, the ad-valorem rates of taxes have a cascading effect on the retail selling prices. The Union government wants the State governments to rationalise their taxes on sensitive petroleum products like petrol, diesel, PDS kerosene and domestic LPG, and also shift from the ad-valorem tax rates to specific tax component. However, it prefers to keep mum over excise duty.
According to estimates, in FY11 the Union government earned Rs135,433 crore and the State governments around Rs90,000 crore as taxes from petroleum products, compared to Rs111,779 crore and Rs72,082 crore, respectively, in 2009-10. At the same time, for FY11, the under-recoveries of OMCs are expected to be Rs116,000 crore, part of which is repaid by the government through cash subsidies, oil bonds and upstream assistance.
The price hike has affected consumers, mostly car owners. In a research report, Religare Capital Markets, said, "While we had maintained that the monthly cost of ownership does not change materially due to an increase in vehicle prices or interest rates, a fuel price increase of Rs19.5 per litre since January 2010 has significantly pushed up the monthly cost of ownership of personal vehicles. Our analysis suggests that the monthly cost of ownership of an average city passenger car commuter has increased by Rs3,000 or 20% since January 2010. The monthly cost of ownership of a two-wheeler commuter in the same period has increased by Rs650 or 20%. About 70% of the increase in the cost of ownership can be attributed to the Rs19.50 per litre increase in petrol prices since January 2010."
With petrol prices going higher day by day, more and more buyers would go for cars powered by diesel. "We expect high petrol prices to lead to a shift in the demand to diesel cars from petrol cars, at least in short to medium term. The gap between cost of ownership between diesel and petrol cars is now about 16% and it would induce customers to consider the diesel car option," BRICS Securities said.
Macro headwinds continue to aggravate and this has increased the ownership cost in the form of higher interest rates, increasing fuel prices and price hikes. Consequentially, footfalls at dealerships as well as conversion rates have fallen over the last two months. Sharekhan in a research report, said, "We do not see headwinds subsiding as we expect the Reserve Bank of India (RBI) to sustain its monetary tightening policy. In addition, fuel prices may see more rounds of hikes in the near future. However, on the positive side, we believe that a good monsoon will play a major role in driving a decent growth in the sector on a high base of FY2011."
June is a very crucial month in India, as the arrival and progress of the monsoon have a sentimental impact on the markets. This time, however, there are other events that could play an important role on the micro-economic front, and the cancellation of the EGoM on the fuel subsidy and price hike is one such factor. In the short-term the market will keep an eye on the political impact of Baba Ramdev's eviction, as also the April index of industrial production (IIP) data, inflation data for May and the RBI's policy rates.