RBI hike looms large

Thu, 16 Jun Closing

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In an eventful last session, indices in the Indian stock market first tried to break into the positive but soon witnessed a heavy bout of profit booking, eventually ending the day just shy of the day's lowest mark. In what can be described as an RBI induced selling, the BSE-Sensex closed with decline of around 150 points whereas NSE-Nifty lost in the region of 50 points. The BSE Midcap and BSE Small cap indices weren't spared either with them losing 0.7% and 0.5% respectively. Advance to decline ratio was clearly split in favour of the latter with there being just one advance for every two decline on the Sensex.

While almost all Asian indices closed lower today, Europe too is witnessing a negative trend currently. The rupee was trading Rs 44.9 to the dollar at the time of writing.

The Indian central bank declared its second monetary policy for the financial year 2011-12 today. Skyrocketing commodity prices, inflationary pressure drove the RBI to tighten its monetary policy once again. The RBI raised the rates at which it lends to (repo rate) banks by 0.25%. Thus the repo rate now stands at 7.5% from 7.25% previously. The rate at which RBI borrows from banks (reverse repo), has been pegged at 1% below the repo rate. Thus, the reverse repo rate has automatically adjusted to stand at 6.5% from 6.25% previously. The increase in the price of commodities globally was cited as the 'key risk factor' troubling the RBI. Post the RBI's aggressive stance in its previous monetary policy review, 47 banks raised their base rates by 1.5-3% during July 2010-May 2011. Thus, credit growth may see a further moderation, hurting India's GDP growth prospects. And this may be the reason why markets suffered a setback today.

Rallis, one of India's largest agrochemical companies ended lower by 1% on the bourses today. While this could be on account of the overall weak sentiment, there is good news for the company in the form of the fact that the company has commenced the commercial production at its new manufacturing facility at Dahej SEZ, Gujarat on June 15, 2011. We believe that this business will provide a very good platform for the company's contract manufacturing business. The current milestone has come in quick succession to the acquisition of a majority stake in a seeds research company, Metahelix in December 2010 and puts the company in a strong position to deliver strong growth in both topline as well as profitability in the future.

As per reports, ITC, the cigarettes to paper conglomerate is in talks to purchase the paper and pulp business of BK Birla promoted Century Textiles. It is believed that ITC has even gone ahead and completed the due diligence for Century's Nainital paper unit. If at all successful, the deal is likely to carry a tag of Rs 30 bn, enabling ITC to increase its capacity to 7 lakh tonnes from the current capacity of 5.5 lakh tonnes. It should be noted that the last major acquisition in this space by ITC was way back in 2003 when it acquired the paperboards business of Ballarpur Industries. The stock of ITC closed flat today while Century Industries closed higher by a strong 6%.