EQUITY MARKETS UPDATE

Markets welcome the New Year on a positive note

Markets had a good start for the New Year, last week, as it jumped on expectations of a second government stimulus package for the economy and hopes of further rate cuts by the central bank and reversed the losses of the preceding week, although on lower volumes. Easing Inflation also waived the positive sentiment in the market. On Friday after market hours the Government announced the stimulus package and RBI cuts repo rate and reverse repo rate by 100 bps and CRR by 50 bps. Sensex rose 6.75% and Nifty rose 6.63% to close at weekend. The BSE Mid-Cap index gained 9.16% and the BSE Small-Cap index jumped 9.07% to 3,870.45 in the week, outperforming the larger indices.

Government announces second stimulus package: RBI cut rates

The government on Friday gave the economy a second stimulus by enabling the industry to borrow more from abroad and FIIs to invest more in the country, besides stepping up public spending. Jointly with the government, Reserve Bank of India (RBI) announced cut in Cash Reserve Ratio (CRR) and other key rates. RBI cut CRR by 50 bps to 5%, repo rate by 100 bps to 5.5% with immediate effect and reverse repo rate by 100 bps at 4%. The cut in CRR would lead to infusion of Rs.20000 Cr into the system over and above Rs.300000 Cr injected since October 2008. All the steps taken by RBI would lead to further reduction in the interest rates by the banks.

While allowing states to access market for borrowing about Rs.30000 Cr to meet additional expenditure, the package provides for liberalisation of External Commercial Borrowing norms and raising FII investment limit in rupee-denominated instruments to $15 billion from $6 billion now. The government also plans to set up a separate company to support non-bank finance companies, and plans to make available up to Rs.25000 Cr to these companies.

India Nov Exports falls

India Exports fell 9.9% in November, the second straight month of negative growth, as the ongoing global recession shaved off demand from key markets like US and Europe. Exports dropped to $11.5 billion in November this fiscal from $12.7 billion a year ago, while imports grew by 6.1% to $21.5 billion. As a result, trade deficit widened by over $10 billion. With the US and several European countries slipping into full-blown recession, Indian exporters have run into difficult times, especially since October when exports contracted by 12.1%, the first time in five years.

Loans to get cheaper, Banks cut PLRs

Almost all banks taking the cue from the RBI have cut their lending rates. Starting with the largest bank in India, the State Bank of India has announced a 75 bps cut in its Prime Lending Rate (PLR) which now stands at 12.25%. Punjab National Bank followed SBI and reduced its lending rate by 50 basis points and now has the lowest PLR of 12% among all banks. Bank of Baroda and Dena Bank too have announced a 75 bps cut in their PLR effective January 01. Their PLR now stands at 12.5% and 12.75% respectively. ICICI Bank announced a 50 bps cut in its floating reference rate for home loans with immediate effect from 14.25% to 13.75%. ICICI's move comes in the wake of public sector banks cutting home loan and benchmark prime lending rates. Housing finance company HDFC has also cut home loan rates earlier this month.

RCom launches GSM operations

Reliance Communications Ltd (RCom), last week, announced the nationwide launch of its Global System for Mobility, or GSM, wireless service. The move makes RCom the ninth player in the GSM-based market. With this launch, RCom has become the only operator to offer GSM as well as CDMA services on a nationwide basis. State-run BSNL and MTNL offer similar services in select regions only. The service will be available in 11,000 towns and 340,000 villages and will reach 24,000 towns and 600,000 villages in a few months. The company has invested Rs.10000 Cr as GSM capex (capital expenditure) till now and will be spending a few thousand crore going forward. RCom added 1.77 million users in November, taking its total number of subscribers to 59.6 million.

Auto Sales on rough track: Maruti's Dec sales falls by 10%

The automobile industry signed off 2008 on a dismal note as domestic sales in December continued to slide despite a 4% cut in excise duties earlier in the month. Car market leader Maruti clocked 56,293 units, down 10% compared to last December's tally of 62,515 units. Its domestic sales were worse off as was down 11%. But compared to November, the tally was up 9%. Tata Motors' domestic sales were down 44% and exports were down 72% on yoy basis. Its commercial vehicle sales were down 51% and passenger car sales were down 31% on yoy basis. In two-wheelers, however,  the trend was different as the discounts and price cuts weren't as widespread as in cars. Hero Honda sold 215,931 units of twowheelers in December, down 10% from the 240,532 units sold in the year-ago period. The company ended the calendar year with a 9% growth. Bajaj Auto's sales were down 33% as compared to the corresponding month last year. In November, Bajaj reported a 37% drop in its motorcycle and the total two-wheeler sales also witnessed a 37% drop, as compared to the year ago period.

Domestics held market up

FIIs were buyers to the tune of Rs. 202.7 Cr in the cash market and were buyers to the tune of Rs.1106.7 Cr in the derivatives market for four days of trading last week. Domestic funds were buyers to the tune of Rs.876.5 Cr for four days of trading last week.

Going Forward

The second stimulus package and rate cuts by the government & RBI would infuse more liquidity into the system, but it would be interesting to see how markets behave to the news as it was expected for quite some time and market has also moved up during these times. On the geo political front the cross border tension seems to be easing which could be a comforting factor for the markets. Markets are likely to be more volatile as we approach the earnings season and also on the derivative front implied volatility seems to be inching upwards after being stable for some time.

DEBT MARKETS UPDATE

WPI - Inflation

The inflation for week ended December 20, 2008 has come in lower at 6.38% as against 6.61% in the previous week. The fall in inflation is mainly due to lower prices of food articles, minerals, and industrial and aviation fuel. The index for Primary Articles was down 0.2%. The Fuel and Power index was down 0.5% mainly on account of fall in Jet Fuel prices, which was down 13%. The Manufacturing index was down 0.1%.

The inflation rate for the week ended October 25, 2008 was unchanged at 10.72% from the provisional estimate.

US Treasuries

The 10yr US treasuries remained in a range of 2.10%-2.37%. The 10yr US treasury prices rose during the beginning of the week on account of Middle-East tension. However, on the gains in the equity market and some amount of profit booking, the 10yr prices fell during the later part of the week. The 10yr US treasury closed at 2.37%.

RBI cuts Rates

The Reserve Bank of India on Friday cut its key rates - Repo and Reverse Repo by 100bps each to 5.5% and 4.00% respectively. RBI also cuts its Cash Reserve Ratio (CRR) by 50bps to 5.00%, which will be effective January 17, 2009. RBI has cut rates to ensure availability of credit at lower rates. RBI said the measures were taken after reviewing the economic situation, which showed evidence of economic activity slowing down.

Outlook

Liquidity was easy during the week with CBLO around 4.50% and call rates in the range of 5.25%. Banks lent on an average Rs.55000 crs. to RBI. Liquidity is expected to be relatively easy next week. RBI has announced T-Bill auction worth Rs. 9500 crs. The 10-year GSEC rallied during the week and touched a low of 5.0% on account of rate cut announced by RBI, announcement of Stimulus Package by Government of India and fall in inflation. The 10-yrGSEC is expected to hit a new high (in price terms) this week and would continue to trade in the range of 4.80%-5.00% band.

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