Sticky inflation spooks markets

Mon, 14 May Closing

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The Indian stock markets had a weak outing on the bourses today post the higher inflation numbers which were announced. This spooked investors, especially those in banking stocks as the RBI may have little room to cut rates further. After opening in the green, markets remained in the positive zone for a bulk of the morning session. However towards noon, the indices trended moved lower and finally closed below par. However they came off the day's lows. While the BSE-Sensex closed lower by around 77 points (down 0.5%), the NSE-Nifty closed lower by around 21 points (0.4%). The smaller indices had a worse day on the bourses however. BSE Mid cap index closed 1% lower. The BSE Small cap, however closed the day 1.3% lower. Healthcare and IT stocks were the biggest index gainers. Oil and gas and banking had a negative day on the bourses with blue chips trading in the red.

As regards global markets, major Asian indices had a mixed outing today with the exception of India. European indices opened the day deep in the red. The rupee was trading at Rs 53.80 to the dollar at the time of writing.

Inflation moved up to 7.23% in April on account of spurt in prices of vegetables, meat, milk and pulses. Onions and fruits however showed a declining trend. In March Wholesale Price Index (WPI) inflation was 6.89%. In April last year, it was 9.74%. The headline inflation for February was revised upwards to 7.39%, from the provisional estimate of 6.95%. Inflationary pressure, driven by prices of food articles, will keep the pressure on the government to remove supply side bottlenecks. However, it may also deter the Reserve Bank of India (RBI) from further reducing interest rates. Reserve Bank Of India (RBI) has projected inflation to be around 6.5% by March 2013. However it has cautioned that it may remain sticky.

Credit ratings agency Moody's downgraded India's three largest private sector banks ICICI Bank, HDFC Bank and Axis Bank. It also downgraded the foreign currency insurance financial strength of Life Insurance Corporation to Baa3. The reason for the downgrade was however ill-conceived. The rating actions took place in the context of an ongoing global review affecting all banks whose standalone ratings are higher than the rating of their domestic government. Their high exposure of Tier 1 capital to government securities was also a factor. Low level of cross-border diversification of operations and an absence of ongoing support from foreign ownership was one of the factors. The rating agency stated that all three banks had strong financial ratios, robust business model, and a focus on retail. However, this did not seem to factor much into the overall rating.

Engineering major L&T announced its results for the fourth quarter (4QFY12) and the full year (FY12). The company recorded an increase in gross revenues of 21% YoY for 4QFY12. Excluding extraordinary items, profit for the quarter was up 25% YoY. Order inflow of Rs 70.6 bn took the year end order book to 1.45 trillion. Growth momentum was slow in most sectors in FY12, being one of the toughest years for the industry. This led to a lot of deferment of capex and fresh investment decisions. However growth was mainly seen in the buildings and factories, infra, power T&D (transmission and distribution) and minerals and metals space. Gross revenues for the year FY12 was up 21% YoY and profits for the full year were up 20% YoY. The board also recommended a dividend of Rs 16.5 per share, amounting to a dividend yield of 1.4%. The stock closed 1.8% higher in trade today.