Correction Time
Moneylife Digital Team 09 April 2010

It has been nine weeks of continuous rally. The market is overstretched. A correction is due after Monday. The only question is, will the correction continue?

The market surged on strong retail data from the US on the last trading day of the week. Positive global cues were the driving force for the market on the beginning of the week also as the BSE Sensex touched its 25-month high on Monday with US unemployment holding steady at 9.7%. After two range-bound trading sessions, the market plunged on Thursday on concerns over the possible tightening of monetary policy. The food price index accelerated for the second straight session, rising to 17.7%, which is higher than an annual rise of 16.35% in the previous week. There is little choice left for the Reserve Bank of India (RBI) but to increase interest rates. The fuel price index rose by an annual 12.71% which is below the annual rise of 12.75% in the previous week. The RBI said that credit growth in India will be at 20% in FY11. Finance minister Pranab Mukherjee projected growth rate in FY11 to be at 8.75% in the twelve months from March reiterating a February finance ministry forecast. The finance ministry has suggested the simplification of the rules for calculating foreign investment in India. The proposed rule which takes out the sundry entries of indirect investment will be beneficial for companies with high foreign investments. The government initiative towards the GST (Goods & Services Tax) regime has started, with the Centre seeking opinion from the Supreme Court on the proposed amendments to the Constitution for implementation of the tax. Grain stocks as on 1st April stood at 42.8 million tonnes (MT), a figure well above the target. While wheat stocks were at 16.1MT against a target of 4MT, rice stocks were at 26.7MT, more than double the targeted 12.2MT.

US treasury secretary Timothy Geithner has said that India and the US should work together on “rebalancing” the world economy. In bilateral economic partnership talks, he said that cooperation by both parties will help to make the economy more stable. Rating agency CRISIL said that more Indian companies will be upgraded rather than downgraded in FY 2010-11. However, CRISIL said key risks that could affect credit quality include a global credit event on sovereign debt, impact of inflationary expectations on interest rates, and exchange rate volatility. The service industry grew at a slower rate in March after it touched a 17-month high in February. The HSBC Markit Business Activity Index, based on a survey of 400 firms, fell to 58.1 in March from 60.9 in February, which was its highest level since September 2008. The IMF agreed that the world economy’s recovery was at a faster pace than estimated, but it was still not out of danger.

The major part of the recovery is attributed to public support rather than private demand which is more important for sustained growth. The US Federal Reserve’s comment on the tightening of the interest rate regime to prevent an impending asset bubble took the US markets down on Wednesday. However, the Fed’s firm point on the need on extending the existing interest rate regime to help economic recovery brought the market back on track on Thursday. The World Bank’s buoyant sentiment about the East Asian economy was reflected in its forecast for economic growth in this region. In a semi-annual economic update, the World Bank said that East Asia will grow by 8.7% in 2010. This is an upward revision from the 7.8% growth it had estimated in November last year.

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