No Direction

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.{break}

During trading hours, agriculture minister Sharad Pawar said that food prices have started falling and will dip further next month. But the government will not restrain large sugar firms from buying sugar from the domestic market, he said. Mr Pawar also said that the wheat harvest would exceed last year’s record 80.6 million tonnes, giving a slightly higher forecast than last week's formal government estimate of 80.28 million tonnes.

Finance minister Pranab Mukherjee said that the economy may grow at more than 8% in the fiscal year 2010-11, after growing at around 7.5% in the current fiscal year ending March 2010. He further added that the government’s measures to tame rising inflation would take some time to make an impact.

On Thursday, 18 February 2010, the Sensex declined 101 points from the previous day’s close, finally ending the day at 16,328, while the Nifty closed at 4,888, down 26 points. During trading hours, government data showed that the food price index rose 17.97% for the year through 6 February 2010. The fuel price index rose 9.89% while the primary articles price index rose 16.23% for the year through 6 February 2010. The surge in food inflation for the fourth straight week in early February 2010, heightened worries of headline inflation going past official forecasts and increasing the chance of the RBI pushing up rates. After trading hours on Thursday, the US Federal Reserve raised the discount rate from 0.5% to 0.75% effective 19 February 2010 and said that the move will encourage financial institutions to rely more on money markets, rather than the central bank, for short-term loans. This led to a fall in stocks across Asia on Friday. The Sensex declined 145 points to 16,183 while the Nifty closed at 4,845, down 43 points.

According to data released by EPFR Global, investors put their money to work more selectively in the week ended 17 February 2010, choosing mostly developed equity markets and investment-grade bonds, while avoiding Chinese stocks and high-yield bonds. China-focused equity funds had net redemptions for the sixth time in the last seven weeks as fears of more central bank policy tightening spooked investors, while Latin American equity funds posted outflows for the fourth consecutive week. Russia and Indian equity funds had relatively small inflows for the week ended 17 February 2010, while Brazil had a second straight week of outflows.

During trading hours, C Rangarajan, the prime minister’s economic adviser, said that India’s economy is likely to grow at over 7.2% in the current fiscal year ending March 2010. The wholesale price inflation is seen at around 8.5% by the end of March, Mr Rangarajan said. He also said that the government’s market borrowing in the next fiscal year ending March 2011 is likely to be around or slightly lower than the Rs4,51,000 crore ($97 billion) in the current fiscal year.

The prime minister’s economic advisory council said that inflation was a down-side risk to its projected growth rate of at least 8.2% in 2010-11, and any policy action would have to factor in the “significant” danger of high food inflation spreading into broader prices. The fiscal imbalance is a matter of concern and the process of consolidation must begin in the next financial year itself, the entity said.

As per media reports, a foreign brokerage predicts that Indian equity and equity-linked offerings may jump by as much as 33% this year. Indian companies may raise $25 billion to $30 billion in share sales in 2010, up from $22 billion last year.

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