Sensex drops below 16,000 levels

Fri, 26 Aug Closing

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For the first time in 18 months, the BSE-Sensex dropped below 16,000 levels today. Overall, the Indian stock market lost 2% this week. The markets had a positive opening, however, the initial momentum could not be sustained for very long. Towards the closing, the indices had a free fall with tremendous selling pressure in realty and metal stocks. While the BSE-Sensex closed lower by around 298 points (down 1.8%), the NSE-Nifty closed lower by around 92 points (down 1.9 %). The BSE-Midcap and BSE-Small cap, however had a worse outing. They closed lower by 2.3% and 2.7% respectively. All sectoral indices saw a coat of red, with only IT and auto indices seeing fewer losses.

As regards global markets, most major Asian indices closed in the red today. European indices also saw bloodshed ahead of Fed chief Ben Bernanke's speech later today. This speech is expected to signal whether the US Central Bank will undertake any new steps to ease liquidity and bolster the US economy. The rupee was trading at Rs 46.15 to the dollar at the time of writing.

Government run fuel retailers may post a Rs 1.2 trillion revenue loss on selling diesel, domestic LPG and kerosene at government-controlled rates in the financial year 2011-12, according to Oil Minister S Jaipal Reddy. This huge loss is despite the recent hike in diesel prices by Rs 3 per litre, kerosene by Rs 2 a litre and LPG rates by Rs 50 per cylinder. Customs and excise duties have also been reduced. Indian Oil, Hindustan Petroleum and Bharat Petroleum currently lose Rs 5 per litre of diesel, Rs 23.7 per litre of kerosene and Rs 247 per cylinder of domestic LPG. Thus, the government will be under huge pressure to absorb the losses on account of the reduction in duties as well as compensation for under-recoveries for these oil marketing companies (OMCs). These losses have an adverse effect on the cash flows and thus the financial health of these OMCs. In order to meet their working capital requirements they are forced to borrow heavily from the market, which adds an interest burden to their shoulders.

The insurance industry in the country has completed ten years post liberalization. Thus, the promoters of Insurance companies will have to bring down their holding to 26%. The finance ministry is expected to soon come up with guidelines on the same. In an additional clarification the Indian promoter can now bring down its equity to 26% anytime after registration, and not only after the completion of ten years. This move helps pave the way for Reliance Life to issue shares to Nippon Life. The company struck a deal with the Japanese insurer to offload 26% stake in March 2011. The deal is worth Rs 30 bn, which gives the firm a value of Rs 115 bn. This clarification may help pave the way for additional deals going forward as well. Promoters of private life insurance companies have together invested Rs 314.4 bn in more than 24 companies over the past decade. The total market value of all these companies put together is estimated around Rs 1 trillion. Diluting the Indian promoter's stake to 26% would mean that the industry would have to find investors to put in a total of around Rs 480 bn.