Weak global markets, RBI rate hike to weigh on domestic bourses

A hike in repo rate – a short term interest rates, by the Reserve Bank of India (RBI) after trading hours on Wednesday, 11 June 2008, and an overnight setback in US stocks are likely to take their toll on the bourses today. The market, however, had factored in a rise in interest rates with bank and realty stocks witnessing a sharp fall over the fast few days. Banks are likely to raise interest following a strong signal from RBI that interest rates in the economy are headed north. Higher interest rates will raise borrowing costs and hit bottom line of corporates.

US stocks sank on Wednesday, 11 June 2008, with all the three indices viz. the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite index - losing around 2%, after oil prices shot back near their record high, stoking fears about inflation and its toll on consumers. More signs of trouble in the financial sector further soured the mood on Wall Street. The Financial Times said on Wednesday that Lehman Brothers may look to raise more capital, hammering shares of the investment bank.

Oil futures jumped almost $7 to an intraday high above $138 a barrel on Wednesday, and settled at $136.38 a barrel on that day.

A surge in global commodity prices led by crude oil spooked stocks across the globe in the past few days. In India, foreign funds have pressed heavy sales. FIIs sold shares worth a net Rs 5170 crore in the first few days of this month, till 10 June 2008. They had dumped stocks worth a net Rs 5011.50 crore in May 2008. Their outflow in calendar 2008 reached Rs 20539.40 crore, till 10 June 2008. There has been heavy buying by domestic funds led by insurance firms in the past few days, but that has failed to stop the slide on the bourses.

A near term trigger for the market will be corporate advance tax payments for the first installment which falls due on 15 June 2008. The income tax law requires a company to 15% the estimated tax liability for the year as advance tax in the first installment. The advance tax payment by the corporate sector will give a cue on Q1 June 2008 results.

The market will also be keeping a watch on the industrial production numbers for April 2008, which the government will unveil today, 12 June 2008, which will give a cue on the extent of slowdown in the Indian economy caused by high interest rates.