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Tuesday, February 20, 2007

Market may remain volatile


Rising interest rates are a cause for concern. The State Bank of India (SBI) on Tuesday (20 February 2007) joined some of the other state-run banks in raising the benchmark prime lending rate (PLR). Interest rates on working capital loans are linked to PLR. Any rise in PLR increases borrowing cost of working capital loans.

After staying cautious for a while, FIIs have once again stepped up buying. FIIs bought shares worth a net Rs 617.10 crore on 15 February, which was much higher than their purchase of Rs 210.50 crore on 14 February 2007. FIIs had stepped up buying since the onset of February 2007, but turned austere later.

Foreign funds turned net sellers on 13 February 2007. The FII inflow was a robust Rs 2909.90 crore in five trading sessions, from 2 February 2007 to 8 February 2007. The strong inflow was triggered by an upgrade in India's sovereign rating to investment grade by global rating agency, Standard & Poor's, on 30 January 2007.

But provisional data showed that FIIs were net sellers on Monday (19 February 2007) to the tune of Rs 6 crore. The Sensex had risen 47 points on that day.

Volatility may heighten this week ahead of the expiry of the February 2007 derivatives contracts on 22 February 2007. On Monday, Nifty February 2007 futures settled at 4,176.45, a premium of 11.90 points over the spot Nifty closing of 4,164.55. Nifty March 2007 futures settled at 4,175.80, a premium of 11.25 over the spot Nifty closing of 4,164.55. FIIs were net buyers to the tune of Rs 437 crore in index-based futures on Monday (19 February). They were net buyers to the tune of Rs 116 crore in individual stock futures that day.

A key near term trigger for global markets is the Bank of Japan’s two-day policy meeting ending on Wednesday (21 February 2007). Analysts are divided over whether it will lift rates to a decade-high of 0.5% from 0.25% currently.

Ahead of the Union Budget, the market will focus more on sectors, which are expected to benefit from the budget proposals. Meanwhile, concerns that a short-term capital gains tax on sale of shares, which is currently at 10%, getting hiked abound. The securities transaction tax (STT) may also go up further. The previous budget had increased STT. The removal of a 10% corporate surcharge may be offset by removal of certain open-ended exemptions.

Most Asian markets were closed on Tuesday for the Lunar New Year holiday. Markets in China and Taiwan are shut for the entire week. Japan’s Nikkei 225 average was down 0.5%, whereas South Korea’s Seoul Composite index was up 0.15% on Tuesday. US markets were closed on Monday.