Markets cheer lower inflation

Thu, 30 Jun Closing

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The stock markets continued on their upward rally for the week. There was strong buying in heavyweights seen towards the close of trade. Indian stock market witnessed another strong closing on positive news globally, as well as food inflation easing for the week. The BSE-Sensex closed higher by around 152 points (up 0.8%) whereas gains on the NSE-Nifty stood at around 47 points (up 0.8%). BSE Midcap and BSE Small cap indices had a relatively weaker outing and closed higher by 0.3% and 0.6% respectively. With today's gains markets have inched up for six days in a row currently.

Most Asian indices also closed strong today. Europe is trading mixed currently. The rupee was trading at Rs 44.69 to the dollar at the time of writing.

Food inflation fell to a 1.5 month low to 7.8% for the week ended June 18. This was on the back of cheaper prices of vegetables, pulses and potatoes. Food inflation, as measured by the Wholesale Price Index (WPI) , stood at 9.1% during the previous week, and over 20% during the comparable period of June, 2010.

FMCG companies are likely to benefit from a decline in palm oil. Other commodity prices have also decreased primarily due to a decrease in prices of crude oil. According to data from the Solvent Extractors Association of India, import prices of palmolein (a key ingredient in a number of FMCG products) have dropped since May 2011. However, companies like Godrej Consumer Products and Dabur have decided not to pass on this decrease in costs to their customers. Their rationale is that they have still not recovered from not increasing their prices enough during the peak of commodity prices. Margins should see an improvement on higher realizations and lower commodity prices. Rallying on this news, the FMCG index was the top sectoral gainer in trade today.

The environment ministry recently approved three coal blocks for a large power plant in Orissa. This finally helps pave the way for the completion of the bidding process for the 4,000 ultra megawatt power project (UMPP). Bids for this project were first invited in June 2010 by Power Finance Corp. (PFC), who is the nodal agency for UMPPs. However, awarding the project was delayed six times, as environmental approval was still needed. This is a similar story for a number of such projects in India. The solution, by the environmental ministry headed by Jairam Ramesh is that the project builders are required to bear the cost of replanting an area equivalent to the forest land diverted for mining. A panel of ministers set up to consider mining in forest areas is scheduled to meet in July. They are likely to discuss delayed projects of Reliance Power Ltd, Essar Power Ltd and the Aditya Birla Group.