On Wednesday, the US Federal Reserve cut its 2008 US economic growth forecast and signaled that mounting concerns over inflation would make further interest rate cuts unlikely, driving the three major US indexes down over 1.5%. Oil prices surged to a record high above $135 per barrel on Thursday, 22 May 2008, stoking fears of global inflation.
At 10:20 IST, the 30-share BSE Sensex was down 329.21 points or 1.91% at 16,914.64. Sensex lost 357.25 points at day’s low of 16,885.91 touched in early trade.
The broader based S&P CNX Nifty was down 96.25 points or 1.88% at 5,021.40.
The market breadth was weak on BSE with 528 shares advancing as compared to 866 that declined. 34 remained unchanged.
Among the 30-member Sensex pack, 26 declined while the rest gained.
India’s largest private sector firm by market capitalisation and oil refiner Reliance Industries declined 1.42% to Rs 2,631.70.
Information technology (IT) stocks rose after the Indian rupee weakened past 43 per dollar to its lowest level in 13 months in opening deals on Thursday, 22 May 2008 as record oil prices raised worries of a widening trade deficit. Satyam Computer Services (up 1.33% to Rs 499.05), Tata Consultancy Services (up 0.89% to Rs 972.50), Infosys (up 0.25% to Rs 1,876), and Wipro (up 0.07% to Rs 495.50) edged higher.
Banking stocks declined. ICICI Bank (down 3.22% to Rs 881.90), HDFC Bank (down 2.11% to Rs 1,384) and State Bank of India (down 1.81% to Rs 1,631.50) edged lower.
Tata Motors (down 3.32% to Rs 666), Maruti Suzuki India (down 2.5% to Rs 796.75), Reliance Infrastructure (down 2.45% to Rs 1,343.95), Larsen & Toubro (down 2.1% to Rs 2,931), Jaiprakash Associates (down 1.96% to Rs 247.90), HDFC (down 2.04% to Rs 2,633.45) edged lower from Sensex pack.
India’s largest tractor maker by sales Mahindra & Mahindra (M&M) declined 2.25% to Rs 652. It has reportedly signed a term sheet with Kinetic Motors to acquire a majority stake in the company. According to reports, M&M is looking to acquire 76% stake in Kinetic Motors valued at about Rs 120 crore. A deal could fructify in the next two months if the due diligence proceeds smoothly, the reports added.
India's largest drug maker by sales Ranbaxy Laboratories declined 1.49% to Rs 496.50. It has reportedly struck two deals with group companies. Ranbaxy has sold some land and building for Rs 90 crore to a group company. It has also picked up 24.91% stake in Shimal Laboratories, another promoter family company, for Rs 93.4 crore, the reports added.
India's largest state-run oil exploration firm in terms of revenue Oil and Natural Gas Corporation (ONGC) declined 1.54% to Rs 922. It is reportedly planning to sell 30% to 40% each in two blocks in Vietnam to share the risks and drilling costs. ONGC owns 100% in the two deepwater exploration blocks. The buyer has not yet been finalised, the reports added.
Idea Cellular declined 1.03% to Rs 110.60. According to reports, a foreign financial investor will pick up a very marginal stake in one of the company's subsidiaries, Aditya Birla Telecom. This subsidiary, is supposed to roll out services in the Bihar circle. An announcement is likely to be made today, 22 May 2008.
Mastek declined 0.88% to Rs 389.15. It is reportedly looking at an overseas acquisition of around $20-30 million during the current financial year.
Thermax declined 0.99% to Rs 459. It reported 15.5% increase in net profit to Rs 80.53 crore on a 12.7% growth in sales to Rs 922.11 crore in Q4 March 2008 over Q4 March 2007.
Gemini Communication declined 2.67% to Rs 259. It reported 11.7% decline in net profit to Rs 6.76 crore on a 71.5% jump in sales to Rs 61.09 crore in Q4 March 2008 over Q4 March 2007.
In Asia, key benchmark indices in Hong Kong, China, Japan, South Korea, Singapore and Taiwan were down by between 0.7% to 2.03%.
Earnings downgrade amid rising input and interest costs, high inflation and drying up of global liquidity due to credit crisis remain major concern for the Indian stock market. Inflation based on the wholesale price index rose 7.83% in 12 months to 3 May 2008, higher than previous week's annual rise of 7.61%, government data released on 16 May 2008, showed. It was the highest since an annual reading of 7.93% on 6 November 2004.
Further, a steep increase in upward revision in inflation rate for the week ended 8 March 2008, to 7.78% from the provisional 5.92%, came as a rude shock to marketmen. According to retail brokerage Sharekhan, the steep upward revision in inflation rate is a cause for concern, as prices of many commodities have not been updated for varied periods. Moreover, a sharp fall in the rupee against the dollar in the past few days has heightened concerns about inflation. This is because the fall in rupee will raise cost of imports which in turn will result in further rise in inflation.
In a bid to rein in inflation, the Reserve Bank of India, on Tuesday, 29 April 2008, raised cash reserve ratio (CRR) by 25 basis points to 8.25%, to suck out excess liquidity in the banking system, in its annual monetary policy review.
With parliamentary elections scheduled next year (May 2009), the government may leave no stone unturned in its attempt to tame inflation. This is bad news for commodity scrips such as cement and steel. Cement maker ACC said earlier this months that its margins will be hurt by a decision to hold its prices for 2 to 3 months that was taken after the government asked cement firms to help contain price pressures. The government recently imposed export tax on basmati rice and some steel products, and cut import duties on key inputs like ferro alloys and metallurgical coke. The government had earlier banned export of cement and non-basmati rice. On 7 May 2008, the government ordered suspension in futures trading in channa, refined soyoil, potato and rubber for four months.
Meanwhile, as per a recent study by CLSA, large amount of foreign currency convertible bonds (FCCBs) issued by Indian companies are coming up for redemption in the next 18-24 months. After recent stock market volatility many FCCBs are at risk of not converting i.e. if the stock market remains subdued, it will stop the bond holders from opting for an equity conversion as it will be easier for them to buy the stock from the open market instead of paying the agreed premium.
When the FCCBs come for redemption, some of these companies may have to take on more debt to redeem the FCCB, thereby raising interest outgo. In the event FCCBs don't get converted, companies have the option to lower the conversion price in line with the market, leading to higher equity dilution. If companies decide to issue fresh FCCBs to finance redemption of FCCBs, it will be at lower premium than earlier.
The structural growth drivers of the Indian economy remain intact – India’s economy is expected to witness a decent-to-strong growth for a long period of time due to favourable demographics. Acceleration in infrastructure creation will be another driver of strong growth in India’s economy. A CLSA report says India’s infrastructure development is set to accelerate, backed by greater private sector participation and improved finances of government and public sector enterprises. Rating agency Crisil in its outlook for Indian economy for the year through March 2009 has stated that the overall growth scenario is expected to remain strong with investment as the main driver.
Given the continued inflow to unit linked insurance plans (Ulips) and equity linked savings schemes (ELSS) of mutual funds, stock-specific buying will continue depending on fundamentals of individual stocks. Insurance firms are now a major player in the Indian stock market given the huge mop up in Ulips in recent years. It was buying support from domestic funds which had aided the recent recovery on the bourses.
Meanwhile, as per recent reports, ELSS which offer tax benefit are catching the fancy of small savers. ELSS funds saw their collective assets jump more than nine times to about Rs 16000 crore in three years ending March 2008. In 2005 the investment limit eligible for income tax breaks was raised ten times to Rs 1,00,000 rupees for ELSS funds. Systematic investment plan (SIP) are said to be driving inflows into ELSS funds.