Sensex drops 174 points, ends at 16,720

Weak global cues, along with speculation over a possible tightening of monetary policy pulled down Indian markets

Speculation that the central bank would tighten monetary policy to help stem rising prices ruled the Indian markets throughout the day, in addition to weak global cues. The Sensex declined 174 points from the previous day’s close, ending the day at 16,720, while the Nifty slipped 54 points to 4,988.

During the day, Suzlon Energy announced the completion of payment of its entire outstanding acquisition loan facility of around $780 million. The stock was down 1%.

Indowind Energy shot up 6% on reports that the firm saw 70% revenue growth in the fiscal year 2010.

Fortis Healthcare was up 1% after the company completed the acquisition of Greenfield Hospitals Division of Wockhardt Hospitals comprising 10 hospitals in the metro cities of Mumbai, Bengaluru and Kolkata (including two under construction), on a going-concern basis.

Smartlink Network Systems said that the shares of the company were de-listed from the Bangalore Stock Exchange with effect from 15 December 2009. The stock was down 4%.

Lanco Infratech was down 3% after the company fixed 5 January 2010 as the record date for giving effect to the sub-division of one fully paid-up equity share of face value of Rs10 each into ten shares (of face value of Rs1), each fully paid up.

During the day, the finance ministry said in a report tabled in Parliament that current levels of capital inflows into India can be managed without “significant costs”. The report also said that raising interest rates could attract more capital into India and complicate policymaking. The finance ministry also said that the central bank was facing a dilemma on timing its exit from an easy money policy, and the challenge was to support the recovery of the economy without compromising on price stability. The country needs to focus on expenditure reforms to cut its high fiscal deficit, the finance ministry noted in the report.

The government is aiming to cut its fiscal deficit to 5.5% of gross domestic product in the fiscal year 2010-11 (April-March), from 6.8% estimated for 2009-10.

The report said pressure on food prices was likely to continue and food imports could help stem price rises. The economy could grow more than 7.75% in the fiscal year to March 2010, the finance ministry said. The ministry further said that the economic survey 2008-09 in July had projected GDP growth could be around 7%, with an allowance of 0.75 percentage points on either side. “With the latest GDP data on September 2009 quarter being higher at 7.9%, the growth outlook for the next two quarters and for the whole year is likely to be in the upper bound of the range predicted, and may even exceed it,” the report said.

Finance minister Pranab Mukherjee said that containing inflation is high on the government’s agenda and the government is monitoring the price situation.

Meanwhile, the International Monetary Fund said that a fragile global economic recovery is underway. It said that a double-dip recession is unlikely. IMF spokeswoman Caroline Atkinson said that questions remained about the sustainability of the recovery, which has so far been driven by policy actions by various governments and central banks.

During the day, key Asian benchmark indices in China, Hong Kong, Indonesia, Japan, South Korea and Singapore fell by between 0.05%-2.05% but the index in Taiwan rose 0.15%. The Bank of Japan unanimously voted to keep its overnight call-rate target at 0.1% as widely expected, and left its overall assessment of Japan’s economy unchanged, and emphasised the need to pull Japan out of deflation—perhaps laying the groundwork for more easing ahead.

According to media reports, the Ifo Institute’s closely watched indicator of German business sentiment rose to 94.7 in December from 93.9 in November. Economists had forecast a rise to 94.5.

Meanwhile, France’s business sentiment index declined to 89 in December from 90 in November, according to the monthly survey by the French National Institute of Statistics and Economic Studies (Insee). Analysts expected the index to be at 91 in December. Insee said that the business climate indicator remains below its long-term average.

On Thursday, 17 December 2009, the Dow Jones Industrial Average slipped 133 points while the S&P 500 and Nasdaq Composite declined 13 points and 27 points respectively as jobless claims rose more than expected.

Jobless claims unexpectedly rose 7,000 to a seasonally adjusted 4,80,000, in the week ended 12 December 2009.

In premarket trading, the Dow was trading 33 points higher.

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    Forensic testing for CAT: Will it be in vain?

    After the fiasco, CAT will be subjected to forensic testing. However, experts believe that this move would just be another futile attempt to come out of the mess

    The computerised Common Admission Test (CAT) will now be subject to application of psychometric expertise and forensic testing to ensure fairness and validity of the test results. This is expected to figure out the batch of students likely to take a retest in January 2010. However, experts believe that this move would just be another futile attempt.

    Psychometric analysis is a standardised procedure for measuring sensitivity, memory, intelligence, aptitude or personality of a candidate. Vijay Mukhi, a well-known cyber expert said, “Forensic testing will not be able to identify the students who faced the problem. If they conduct the testing from the server side, all Prometric will receive is the series of questions that have been answered.”

    Mr Mukhi explained, “Forensic testing (which is used to explain the current state of a computer system, storage device or document) is used when you want to probe into a crime and there is no crime involved here. I don’t know why they are doing this testing because a very simple reason is that the viruses shouldn’t have entered the system in the first place. Forensics will only prove from where the virus came from. We are already aware of this.”

    About 2.42 lakh candidates registered for CAT 2009. About 2.16 lakh candidates completed the test successfully. The CAT committee yesterday said that about 24,000 students did not show up for the test. Another 2,000 candidates, who were rescheduled from the first testing window, remain to be tested.

    Students who were genuinely affected by the technical glitches and are thus worried about the fairness and results of the testing procedure will get a retest after Prometric completes the entire reviewing process which will be held in mid-January 2010.

    Prometric (India) managing director Soumitra Roy told PTI, "Prometric and the IIMs will be following industry-standard procedures to evaluate the answers. This consists of a combination of computer analysis and the application of psychometric expertise to ensure fairness and validity of the test results. We will contact them (the candidates) to reschedule the examination.”
    Prometric has already said that the answers have been not been affected by the virus attacks which disrupted the test from the beginning. It has further said that it was in the process of identifying candidates who have failed to appear for the test.

    According to Mr Mukhi, the real problem that Prometric faces is that it will have to prove that when the results were sent to the main server, no one would have had the ability to change the marks on the master server. Mr Mukhi also warned that failure in ruling out this possibility, could lead to litigation from the students.

    “The fact is that they used machines (for the examination) that were used for other purposes. Hence the virus attack (took place),” Mr Mukhi added.

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    Trade Timings

    The truth of the matter is that each stock exchange is principally acting in its own interests. The interests of its powerless stakeholders can always be taken care of by time and their lack of collective will.

    Competitive one-upmanship is not uncommon in business. The telecom wars being currently fought out are a good example. But, when this happens in a duopoly like the stock exchange business, it makes one wonder why. The recent competitive rush to increase trade timings played out between the BSE and the NSE is an exposition of how management processes work and the impact they have on stakeholders’ interests.

    The genesis of this problem lies in the changed structuring of the stock exchanges and the diminishing hold of stakeholders over them. Stock exchanges were traditionally collectively managed by brokers. That was before the launch of the NSE. The NSE was established as a third-party service provider. It was not owned by brokers. As a self-regulatory organisation, the exchange has unrestricted ‘leverage’ over its members. The members have to ultimately bear in mind that it is the exchange which they will have to deal with on a day-to-day basis. The exchange knows this only too well and has always kept its members almost like a subjugated and subservient community. ‘Remember, we audit you’ is the unstated message from the NSE to its members.

    The decision-making process of the NSE has therefore been centred on its ability to keep SEBI on the right side of what it does. The brokers’ views have not bothered the management of the stock exchange as long as they could take the regulator along. This mindset has dominated all that the NSE has done in its history and its latest decision is no different. The BSE has copied the NSE and corporatized itself over the years. Today, its professionals guide a paranoid board and a sense of extreme desperation pervades all they do. The BSE's attempt to play catch up with the NSE in the F&O business has triggered this rash decision spree. 

    More trading hours should normally mean more business. Higher brokerage incomes should therefore be the most expected outcome from this move. More business means bigger earnings for the stock exchanges. Maybe the stock exchanges will go public shortly. Needless to say, the professional executives will be given lucrative ‘options’ to benefit from the listing. ESOPs will emerge as the key driver of executive compensation. The decision-making process for the extension of timings seems driven by this imaginary growth paradigm. The stock exchange whose revenue model works like a ‘toll’ has everything to gain and little to lose from longer hours. It is a no-brainer that this move benefits them in good times with very limited downside in bad times.

    Let us see how this move will impact other stakeholders like the dealers who work long hours and the back-offices which are already stretched. This extension won’t stop here. There is more bad news waiting for them.

    From the brokers’ viewpoint, these are good times for the markets. But, one should not assume that good times will last forever. What needs to be factored in is that there will be bear markets when costs will remain fixed and incomes will fall.

    The outcome will ultimately result in higher costs to brokers, greater pressure on smaller entities, closure of the smaller brokerages, consolidation of the broking industry and greater share of the overall business for larger brokerages.

    Cost increases will ultimately need to be passed on. It is quite evident that brokerage fees will rise. Transactions costs for the retail investor will increase.

    But all this hardly matters to the stock exchange. For, the truth of the matter is that the exchange is principally acting in its own interests. The interests of its powerless stakeholders can always be taken care of by time and their lack of collective will.

    One last confession from me in conclusion: While I was writing this piece, I forgot to think about how the investor benefits. But I'm not the only one to do so. I have the NSE and the BSE for company.

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