The market may remain under pressure

Last week, we had said that a downmove is quite probable and that may see a dip to below 16,500 before the next leg up. The Sensex ended the week at 16,720, down by 400 points. Speculation that the surge in wholesale price inflation index may add pressure on the central bank to raise interest rates weighed heavily on investors’ sentiments throughout the week.

On Monday, 14 December 2009, the Sensex declined 21 points from Friday’s (11 December 2009) close, ending the day at 17,098. The Nifty closed at 5,106, down 12 points. As per data released by the government, inflation based on the wholesale price index (WPI) surged 4.78% from the previous month’s annual rise of 1.34%. The food article index within the wholesale price index rose 16.71% in November 2009. The manufacturing products index in the WPI rose an annual 3.99%. In its October policy review, the Reserve Bank of India (RBI) had raised its WPI inflation projection for end-March 2010 to 6.5% with an upside bias, from 5% earlier. During trading hours, trade minister Anand Sharma said that rising wholesale prices were a matter of concern and the government is monitoring prices of essential commodities.

On Tuesday, 15 December 2009, the Sensex closed at 16,877, down 220 points, while the Nifty ended the day at 5,033, down 73 points, on fears of monetary tightening by the central bank. The government’s total spending will remain at Rs10,20,000 crore ($218 billion) for the fiscal year to March 2010, same as the budget estimate made in July 2009, said finance minister Pranab Mukherjee. Mr Mukherjee also said that the federal fiscal deficit in 2009-10 would remain within the targeted 6.8% of gross domestic product. On Wednesday, 16 November 2009, the Sensex gained 36 points, ending at 16,913, while the Nifty closed at 5,042, up 9 points. The prime minister’s economic adviser C Rangarajan said that the RBI may tighten monetary policy in this month as inflation could reach 7% by March 2010. He also said that there usually is a seasonal decline, but it certainly appears that inflation by end of March will be higher than what has been projected earlier by the RBI.

After a continuous decline over the last 13 months, exports rose in November 2009, adding to the flurry of positive economic data, but the news was greeted with caution by policymakers and exporters. Exports grew 18.3% to $13.20 billion in November from a small base last year, thanks to the Christmas shopping season.

The finance minister said that the government will take steps to tame rising prices and enable the economy to recover faster. Mr Mukherjee said that the government intends to push tax reforms and cut its already-bloated fiscal deficit to 3% of gross domestic product after 2001-12 fiscal year from 6.8% estimated for the current financial year ending March 2010. The government offered fiscal stimulus in the form of tax-cuts and higher spending, which widened the fiscal deficit that has to be funded by a record borrowing of Rs4.51 trillion ($96.6 billion) in 2009-10. He said that the deficit was “unsustainable”, and the government would reduce it to 5.5% in fiscal year 2010-11 and to 4% in 2011-12. On Thursday, 17 December 2009, the Sensex declined 19 points from the previous day’s close, ending the day at 16,894, while the Nifty remained flat at 5,042. As per data released by the government, the food price index rose 19.95% in the year to 5 December 2009.

The fuel price index rose 3.95% and primary articles index rose 14.98%. The Federal Reserve kept its target range for its bank lending rate at zero to 0.25%, the same level since last December 2008, and it repeated its pledge to keep rates at exceptionally low levels for an extended period.

On Friday, 18 December 2009, 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. Next week, the market will be on tenterhooks about a possible rate hike. The finance minister said that containing inflation is high on the government’s agenda and the government is monitoring the price situation. If the RBI moves to act, the market will correct even more.