Volatility reigns in the final hour

Thu, 3 Dec Closing

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After trading firm for most part of today's session, the benchmark indices plunged into the red during the latter half of the day as intense selling activity at higher levels took toll. The final trading hour was witness to considerable volatility with the indices barely managing to close above the dotted line. While the BSE Sensex closed higher by around 16 points, NSE Nifty closed higher by 8 points. The BSE Midcap and BSE Smallcap indices closed with gains of 0.4% and 1% respectively. Auto stocks emerged amongst the losers today, while healthcare and metals stocks led the pack of gainers.

While most Asian indices closed strong today, Europe is also trading firm currently. Rupee was poised at Rs 46.16 to the dollar at the time of writing.

As per a leading business daily, NTPC has received a setback as GE Energy Financial Services and Brookfield Renewable Power Inc. have exited a proposed renewable power joint venture (JV) with the company for setting up 500 MW of non-conventional power generation capacity. Both these companies appear to have withdrawn due to the ongoing global financial crisis. The other partners in the proposed JV are the Asian Development Bank (ADB) and Kyushu Electric Power Co. Inc. While NTPC was to have 40% equity in the venture, the partners were to have a stake of 15% each. The agreement was signed in August 2008 and the scope of the JV included looking at wind power and hydroelectric power.

It must be noted that NTPC has outlined an aggressive generation capacity addition plan for the eleventh five-year plan (2007-12), which will take its cumulative capacity to near 46,000 MW by the end of FY12. Given the regulatory nature of the business (14% assured return on equity), asset creation (capacity addition) is the only way of growing for power generation companies. The stock closed flat today.

Pharma stocks closed mixed today. While Ranbaxy and Cipla found favour, Dr.Reddy's and Sun Pharma closed in the red. Ranbaxy closed higher by 6% today and the stock price has nearly quadrupled since the rally began in March. This is despite the fact that the company has not yet resolved its issues with the US FDA and continues to witness decline in sales. The ban on both its Poanta Sahib and Dewas plants has hit the US business of the company hard. While the performance of the US business was subdued in CY08, it has not been spared in 9mCY09 either as sales from this region continued to decline. The only silver lining has been on the profitability front. As against a loss of Rs 2.3 bn reported in 9mCY08, the company managed to report profits of Rs 487 m in 9mCY09. This was largely due to the considerable reduction in forex losses which pushed Ranbaxy into the red in CY08.

India's GDP may have grown by 7.9% during the September quarter but inflation has also been soaring. As reported in a leading business daily, in the third week of November, food inflation rose to 17.5% as against 15.6% a week ago. The reason for the same has been attributed to supply shortages fuelled by weak monsoons this year.

Given that both food prices and foreign inflows have been rising, inflation is set to pose a major challenge to the RBI. As a result, a hike in interest rates seems most likely on the cards. But it remains to be seen when the RBI takes this inevitable step. Given that India's GDP has grown strongly in the last couple of quarters, the central bank certainly hass more headroom for increasing interest rates.