Indian markets lone gainer in Asia

Tue, 8 Dec Closing

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Managing to recoup almost all the damage that was done yesterday and in the early session today, the Indian indices charted a strong up move in the final hours and closed firmly in the positive today. While the BSE Sensex edged higher by around 245 points (up 1.4%), the NSE Nifty gained around 81 points (up 1.6%). Strength was also seen amongst BSE Midcap and Smallcap indices as they were stronger by around 1.3% and 1.4% respectively. Realty and commodity stocks, in particular, seemed to be in favour, in tune with the IPOs in real estate and infrastructure-related sectors.

Other Asian indices largely closed flat to negative today while the European indices have opened higher. The rupee was trading at Rs 46.58 to the dollar at the time of writing.

The Indian auto sector that has seen one of its best quarterly performances in the third quarter of FY10 may have to brace up for lower margins. While the commodity prices that have been beaten down may not go up in a hurry, adoption of greener technology may entail higher costs. The climate change negotiations at Copenhagen are expected to result in increased costs for Indian businesses as a whole and Indian auto sector in particular. According to news reports, India’s refineries are not fully prepared to supply fuel that will meet the new emission standards applicable from 1 April, 2010. On that date, four-wheelers sold in 11 major Indian cities would have to comply with Bharat Stage IV (equivalent to Euro-4) norms. Besides, four-wheelers sold in the rest of the country would have to comply with Bharat III emission norms. Hence, automakers will have to provide technology to accommodate the intermediate changes. Stocks from the sector including Tata Motors and M&M traded higher today.

As much as India needs minimal execution risks in its infrastructural development , the country continues to face systemic issues. As per a business daily, about a third of the highway projects involving a sum of Rs 85 bn are stuck in arbitration despite the government’s best efforts to speed up road development in the country. Around 123 highway projects out of a total of 406 awarded so far by the National Highways Authority of India (NHAI) since 2000 are caught in the arbitration tangle. The disputes have arisen due to reasons like input cost escalation, royalty charges on minerals, entry tax and removal of public utilities on acquired land for road construction. Among the major companies engaged in arbitration are L&T which has five projects under dispute settlement involving an amount of Rs 5.8 bn and HCC that has three projects worth Rs 735 m.

In an effort towards financial inclusion, the RBI plans to allow more local area banks to operate from the next financial year. According to the RBI, the local area banks are likely to have a capital adequacy ratio higher than 15%. The scheduled commercial banks are required to have a minimum capital adequacy ratio of 12%. The higher capital adequacy requirement is to offset higher risk arising from being geographically focused. However, we believe that while the measure may be good at bringing in financial inclusion, it will not help the cause of the banking sector that is looking to consolidate operations and bring in scalability and efficiency. Further, many local banks in the US have gone bankrupt in the past year due to high slippages. Thus, the model poses higher risks than returns. Stocks from the banking sector including IDBI Bank, PNB and OBC were the lead gainers today.