Down on Asian cues

Tue, 12 Jan 09:30 am

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The Indian markets have started on a weak note. The benchmark indices opened above the breakeven mark but have not managed to stay in the positive territory since then. Asia is currently trading in the red with Taiwan (down 0.6%) leading the pack of losers. However, the US markets closed higher by 0.4% yesterday.

Currently, in India, heavyweights from the BSE-Sensex are trading in the red with metal and banking stocks leading the pack of losers. However, the software heavyweights are in the green. The BSE-Sensex is trading lower by 4 points, while the NSE-Nifty is down 1 point. However, buying interest is being witnessed among mid and small-cap stocks as the BSE-Midcap and BSE-smallcap indices are trading higher by 0.3% and 0.6% respectively. The rupee is trading at 45.48 to the US dollar.

Energy stocks have opened the day on a mixed note. Gainers here include Reliance Industries and BPCL. However, Gujarat Gas is in the red. As per a leading business daily, ONGC has asked for an income tax holiday on the production of natural gas. It may be noted that the production of 'mineral oil' receives a 7-year income tax holiday under section 80-IB (9). The Finance Bill in 2009 provided the holiday with a retrospective effect. However, ONGC wants the tax holiday period with prospective effect and that too extended from 7 years to 10 years.

Infrastructure sectors such as power generation and distribution benefit from a 10-year holiday. The upstream major is also seeking inclusion of natural gas in the proposed Goods and Services Tax regime in order to bring uniformity in the levy of sales tax. In our view, the tax holiday should be extended to natural gas. India desperately needs domestic sources of hydrocarbons. It is inviting international investors under the New Exploration Licensing Policy. Hence, it makes little sense for it to deny the same benefits that other high priority sectors receive.

Banking stocks have opened the day on a weak note. Losers here include SBI and HDFC Bank. As per a leading business daily, SBI is expected to set aside more funds to meet the new norms that mandate 70% provision coverage for non-performing assets (NPAs). In its mid-term credit policy review, the Reserve Bank of India said that banks would have to attain a minimum 70 per cent coverage ratio by September 2010. Provision coverage ratio is the ratio of a bank's total provisions to gross NPAs. Currently, SBI's coverage ratio is around the 58% mark. Bank of India is at the 68% mark, while Indian overseas bank is at 62%. In our view, the RBI is correct in enforcing the provision norms. However some more clarity with regard to calculation and risk weightage is still needed.