Budget, inflation fear grips markets

Thu, 18 Feb Closing

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The benchmark Indian indices had a rather volatile outing today with every attempt to move closer to the dotted line proving futile. While banking and power stocks evinced investor interest, those from the telecom and commodity sectors bore the brunt of profit booking. Starting off close to the dotted line, the indices moved deeper into the negative territory as the session progressed. Worries over stimulus rollback in the forthcoming budget and rise in food inflation to 18% this week seem to be keeping investors on the sidelines. The mid and smallcap stocks also shed gains and their respective indices ended the session lower by 0.6% and 0.4% respectively.

While the BSE Sensex closed lower by around 101 points (down 0.6%), the NSE Nifty lost around 26 points (down 0.5%). As regards global markets, most Asian indices closed lower today while European indices have opened on a mixed note. The rupee was trading at Rs 46.26 to the dollar at the time of writing.

Auto stocks were amongst the key losers in today's trade as investors accounted the fact that the auto makers who enjoyed a record-breaking sales run in recent quarters are now bracing themselves for upheaval. Led primarily by changing government policies and rising inflationary pressures most auto companies are set to witness a decline in volumes as well as realisations. Companies like M&M, Tata Motors, Maruti Suzuki and Ashok Leyland are already contemplating price hikes in the region of 1% to 3% on the back of increased commodity prices. However, they may have to take another round of hikes due to the partial rollback of excise duty post budget and rollout of Bharat-IV compliant engines from April. The companies will therefore need to sacrifice on volumes as well as margins.

Keen to bolster banks' capital base but hamstrung by fiscal strain, the government is mulling selling some parts of its stakes in few PSU banks to state-owned insurance companies like Life Insurance Corporation (LIC) and General Insurance Corporation (GIC). Even after the stake sales, the government will continue to be in total control of these banks, either on its own or through cross-holdings. The rationale behind the move is that it would enable the Centre to infuse fresh equity into the PSU banks from resources raised from the banks themselves and still retain full control. In some cases, the government would have a majority stake (51% or above) in these banks on its own, and in others, it will have a majority stake along with institutions owned by it like LIC. The move certainly seems benign for banks in which the government holding already stands at 51% and currently offers no scope for dilution or capital infusion. Stocks from the PSU banking sector like SBI, PNB and Union Bank witnessed some profit booking today.

The International Monetary Fund (IMF) has announced that it will shortly begin selling 191.3 tonnes of gold in the open market under a program approved last year to boost its resources for lending. It may be recalled that the IMF had earlier cited its plans to sell a total of 403.3 tonnes of gold, about one-eighth of its total stock. This is primarily to diversify its sources of income and increase low-cost lending to poor countries. So far, India, Mauritius and Sri Lanka have purchased a total of 212 tonnes of gold from the IMF. The RBI was the biggest purchaser of gold snapping up 200 tonnes of the yellow metal over two weeks in October 2009, boosting its gold holdings to the 10th largest among central banks.

We think it would be a good move by the RBI to participate in future gold purchases from the IMF. The same would be a good option to protect wealth as opposed to the US Treasuries, whose safety is being questioned on the back of US' massive debt and the declining value of the dollar.