Weekly Review: Pressure building up on the bulls
Moneylife Digital Team 31 July 2010

The market started the week on a soft note ahead of the Reserve Bank of India's (RBI) monetary policy announcement on 27th July. Taking the lending and borrowing rate hike by the central bank in its stride, the market ended in the positive terrain the next day. However, the market remained range-bound for the rest of the week. The Sensex and the Nifty ended 1% down on a weekly basis.

The top Sensex gainers during the week were Mahindra & Mahindra (M&M) (up 6%), HDFC Bank (up 4%), Hindalco Industries and ACC (up 1% each). Maruti Suzuki (down 12%), Jaiprakash Associates (down 8%), Hero Honda, Larsen & Toubro (L&T) and DLF (down 7% each) were the top losers on the benchmark.

The PSU index with a gain of 1% ended as the sole gainer in the BSE sectoral pack. Capita goods (down 5%) and the oil & gas index (down 3%) were the top sectoral losers.

The RBI, in its first quarterly review of the monetary policy announced on 27th July, increased the short-term lending rate (repo) to 5.75% and short-term borrowing rate (reverse repo) to 4.50% with immediate effect. It, however, kept the cash reserve ratio (CRR), the cash which banks are required to keep with RBI, and bank rate unchanged as liquidity is tight in the system following over Rs1 lakh crore outgo due to payments by telecom companies for acquiring spectrum.

Food inflation fell to single digit at 9.67% for the first time this year at a time when the government is facing a concerted opposition attack on rising food and fuel prices. Inflation fell by 2.80 percentage points for the week ended 17th July from 12.47% in the previous week, on a decline in prices of vegetables, especially potatoes and onions.

Fuel inflation for the week ended 17th July inched up marginally to 14.29% as compared to 14.27% for the previous week. The impact of the government's hike in retail fuel prices last month is still seen to impact the fuel price inflation albeit to a lesser extent.

Global rating firm Moody's upgraded India's local currency sovereign rating by a notch on the country's efforts toward fiscal reforms and the economy's capacity to face a crisis, a move that that will result in greater capital inflows and appreciation of rupee value. Though the global rating agency has upgraded the local currency government bond grading from Ba2 to Ba1, it is still a notch below investment grade. Moody's has a positive outlook on the rating, which means there might be a further upgrade later.

The country's infrastructure industries expanded by 3.4% in June, the lowest in 10 months, on a sharp slide in coal, electricity and cement output. Output of crude oil, petroleum refinery products and steel that make up the six core infrastructure industries were marginally higher or flat, according to commerce ministry data released this week. The six industries account for around 27% of factory output measured by the Index of Industrial Production (IIP).

The Instanex FII Index for the week ended 30th July was down 2% at 375.60 and the Instanex DII 15 portfolio was down 1%. Of the 20 components of the Instanex FII Index, 16 were down, TCS was unchanged and three were up. The main losers were Maruti Suzuki (-12%), Jaiprakash Associates (-8%) and Hero Honda (-7%). The main gainers were HDFC Bank (+4%) and ITC (+2%).

Monsoon rains across the country are expected to be better than earlier forecast for the remaining season but the eastern regions could see deficient falls. Ajit Tyagi, director general India Meteorological Department (IMD) said a late monsoon surge in July has bridged the gap in the rainfall for the month which now was 1% more than normal. He added the rainfall was evenly distributed across the country and over 75% part of the country had received normal rainfall.

Credit growth of banks stood at 21.26% during the one-year period ended 16th July, up from 14.70% a year ago, as per RBI data. As on 16th July, bank credit stood at Rs34.61 lakh crore. In absolute terms, credit expansion was Rs6.06 lakh crore. The RBI, in its annual monetary policy estimated that credit would grow by 20% this fiscal.

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