Anxiety over RBI's next move

Tue, 12 Jan Closing

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Selling pressure intensified during the closing hours of trade, leading to the markets ending lower on yet another occasion today. While BSE Sensex edged lower by around 104 points (down 0.6%), NSE Nifty closed with a loss of around 40 points (down 0.7%). BSE Midcap and Small cap indices also came in the firing line today, as they shed more than 1% each.

While Asian indices closed mixed today, a negative trend is being witnessed among European indices currently. Rupee was trading at Rs 45.5 to the dollar at the time of writing.

Today's weakness perhaps had its genesis in India's robust growth in industrial output in the month of November. As per reports, India's November industrial output grew at its fastest pace in 2 years as it rose 11.7% YoY. This not only surpassed expectations of most economists, but it also sets the stage for a sooner than expected interest rate hike by India's central bank. Coming as it does just days before the RBI is all set to undertake its monetary policy review exercise, it makes the case for an interest rate hike all the more potent. If not interest rate hikes, the RBI looks all set to withdraw excess liquidity from the system by way of a CRR hike. Little wonder, the market chose to express their anguish through a bout of profit booking.

Metals stocks were amongst the top losers on the index today, thus leading to an end to their recent mini rally. Counters like Tata Steel, Sterlite and SAIL lost in the region of 3%-4% each today. For one, disappointing earnings from US aluminium heavyweight Alcoa seems to have rubbed off on Indian metals stocks as well, and secondly, investors also seemed to have taken some profits off the table in view of the recent rally that had seen most of the sector stocks witness decent gains. Prospects from a medium to long term perspective continue to remain attractive what with strong growth in the Indian economy and rush towards hard commodities and commodities producing companies on account of the expected weakness in the US dollar.

IT stocks populated the list of top gainers in the BSE 'A' group today. Infact, half of the top 10 gainers amongst the 'A' group stocks came from the IT sector. The catalyst no doubt was the better than expected show put up by Infosys during the third quarter of the current fiscal year. Most importantly, it has managed to improve its operating margins despite the impact of an appreciating rupee. The management believes that even though the IT budgets are expected to be flat in 2010, offshore outsourcing is likely to benefit from the ongoing economic recovery. A view not far from what we have. Heavyweights like TCS, Wipro, Infosys and HCL Tech all closed in the positive.