Inflation fear plays spoilsport!

Tue, 29 Dec Closing

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Markets traded quite volatile during the closing hours of the day and in the end, while the indices did close in the positive, they sold off substantially from the day's high. The BSE Sensex edged higher by nearly 40 points (up 0.2%), while the Nifty closed the day with gains of around 10 points. BSE Midcap and Small cap indices also closed the day with gains, edging higher by 0.5% and 1.2% respectively. Advance to decline ratio was evenly split on the Sensex today as for every one stock that gained another one declined.

While most Asian indices closed in the positive today, Europe is also trading in the positive currently. The rupee was trading at Rs 46.7 to the dollar at the time of writing.

Although the markets did close in the positive, a decline of around 90 points on the Sensex from the day's high also needs to be looked into. Perhaps, the bond markets could provide a clue or two. The 10-year benchmark yield moved up 3 basis points today, a sign that interest rates may rise. Apparently, one of the deputy governors of the RBI made clear the stance of the central bank that in case of a fight between growth and inflation, it may choose the latter.

In other words, if the inflation deteriorates further, be prepared for higher interest rates. Little wonder, the stock markets took an exception to this. Also, after such a heady year, FIIs may look upon intraday spikes like the one that happened today, as an opportunity to sell and this might have also led to the weakness. All in all, get ready for some bumpy ride ahead.

ING Vysya Bank, the South focused private sector bank was amongst the leading gainers in its space today. The counter also witnessed a huge spurt in volumes. The optimism seems to have been triggered by the statement from the country's Head of Retail Banking recently that the bank now wants to focus on growing nationally. The Retail Head further added that the bank had licenses for opening 60 branches out of which 55 were outside the Southern region. The company also has enough capital for expansion, courtesy the Rs 4 bn that it raised through a QIP recently. While we are enthused by the bank's enhanced capital and focus on expansion, it will have to tread carefully given its relatively weaker loan book. Other gainers from the sector included ICICI Bank and DCB.

Lubricants major Castrol also traded strong today. Infact, the company emerged as one of the top gainers amongst the BSE 'A' group stocks. The company, which has recorded a stellar financial performance during the first nine months of the current calendar year, looks all set to close the year in a similar fashion. Base oil price, which is a key raw material for the company has had a rather timid move these past few months and if OPEC projections are any indication, there isn't a lot of strengthening likely to happen in 2010 as well, thus leaving the door open for Castrol to reap even greater dividends in 2010. Also, with more and more people wanting to switch to better quality lubricants for their vehicles, volume growth should also remain strong for the company in the medium to long term. All these factors put together seem to be lending buoyancy to the company's stock.