Sensex slips despite softer inflation…Rupee weighs

Tuesday’s relief rally was perhaps more of a flash in the pan. Indian markets resumed their southbound journey as fall in November inflation was not as sharp as anticipated. In addition, the rupee extended its recent slide, hitting a new all-time low versus the US dollar. The yield on the 10-year benchmark Government bonds spiked to 8.5%. Weakness in the euro also partly weighed on the sentiment amid lingering concern about the eurozone debt crisis. Most world markets were also down after the Federal Reserve refrained from announcing any new stimulus measures at its last meeting of 2011.



Overall, the trade today was pretty choppy, with the key indices oscillating wildly intraday, especially in the afternoon. Eventually, the two benchmarks closed near their session lows. Market breadth was weak as Small-Cap and Mid-Cap shares also slipped. Barring FMCG, all the sectoral indices on the BSE were down today. Media was another space that managed to buck the negative trend. The India VIX gained over 2% today after falling by ~4% in the previous session. The BSE Sensex and the NSE Nifty finished below 16,000 and 4,800, respectively.

The Sensex shut shop at 15,867, down 135 points or 0.85% over the last close. It touched a day’s high of 16,133 and day’s low of 15,855. The Nifty lost 0.8% to end at 4,763. It touched a day’s high of 4,839 and a day’s low of 4,750.

The BSE Small-Cap index dropped 0.8% while the BSE Small-Cap index was down 1%.

Realty, Metals, Power, Consumer Durables, PSU and Auto indices were the top losers, down 1.5% to 2.5%. Capital Goods and Oil & Gas indices fell over 1%. The FMCG index was up marginally. The CNX Media index on the NSE rose 0.8%.

Government data showed that inflation stayed above 9% in November while September's reading was revised to 10% from 9.72%.

The wholesale price index-based (WPI) inflation stood at 9.11% in November as against 9.73% in October. It was more than the consensus forecast of 9.04%.

The fall in inflation last month was largely fueled by cheaper food prices, although price pressures in fuel and manufacturing side increased.

Some economists had expected inflation to drop below 9% last month from October's level of 9.73%. However, with that prediction not materialising, it will be interesting to see what the RBI does at its policy review on Friday.

The central bank has already indicated that it will hold policy rates steady at the December 16 meeting after hiking rates 13 times in the past one-and-a-half years.

However, the markets are looking for hints on what the RBI's stance will be now that GDP growth has slowed sharply and inflation is showing signs of cooling.

Abheek Barua, Chief Economist at HDFC Bank believes that the RBI will not opt for a CRR cut when it meets this Friday for its mid-quarter review. The central bank will instead focus on using tactical measures such as OMO buybacks to ease the recent drag on liquidity, he says.

With growth slowing much more than expected and the likelihood of headline inflation cooling to 7.0% by March, the central bank is likely to build in a dovish rhetoric in its monetary stance, leaving the door open for a possible CRR cut in January and a repo rate cut in Q1 FY13, he says.

Meanwhile, Kaushik Basu, chief economic adviser to the Finance Ministry said today that he expects food inflation to drop to 3% within a month. Food inflation dropped to 6.6% in the year to November 26, its lowest in nearly three-and-a-half years, from an annual 8% in the previous week.

The rupee declined to a new record low on concern that slowing economic growth may hurt demand for the nation’s assets. It touched an all-time low of 53.76 today and is down more than 20% in less than five months. Year-to-date, it is down ~16-17%, among the worst performing global currencies.

A steep fall in the rupee since August to an extent reflects the rapid deterioration in India’s economic fortunes. A big problem is that policymakers have little room to arrest the economic slowdown. The RBI cannot afford to cut rates as inflation remains elevated. The Government is also hamstrung due to a swelling fiscal deficit.

The eurozone credit crisis and anemic US economy have made matters worse. Downside risks for the Indian and global economy still persist. Therefore, one cannot rule out further drop in equities and currencies. There is only one option - endure the pain and avoid misadventures.

US shares fell as the Fed policy makers did not announce new stimulus measures. European indices were largely under stress on Germany’s reported rejection of increasing Europe's proposed bailout fund. German Chancellor Angela Merkel's comments overshadowed decent debt auctions from Spain, Greece and Belgium. The EFSF also sold €1.97bn in three-month bills.

European markets extended losses today while Asian indices too were mostly down.

Areva T&D shares tumbled as the proposed demerger of its distribution business took effect. The company’s Board has fixed Dec. 15 as the Record Date for the same.

IFCI was under pressure after a parliamentary committee found irregularities in the appointment of Atul Kumar Rai, the current Chairman and Managing Director of the state-controlled lender.

3i Infotech was down amid reports that the company is struggling with huge debt burden. The stock is down 90% from its peak of Rs. 162.

Reliance Capital fell after a parliament panel rejected the proposed hike in FDI in insurance. L&T was up amid reports that the Centre could impose 14% import duty on power equipment. Tata Communications rose amid reports that a Cabinet note has been prepared for their comments in 15 days for selling 770 acres of surplus land of VSNL.

TTML advanced on reports that Japan’s DoCoMo could increase stake in its parent company. NTT DoCoMo Inc. has made no decision regarding increasing its stake in Tata Teleservices Ltd., a company spokeswoman said.

Cable service providers gained after the Lok Sabha yesterday passed the Cable Television Networks (Regulation) Second Amendment Bill aimed at digitalisation of cable TV.

Jain Irrigation, Simplex Infra, NDTV, Delta Corp, Escorts, Indiabulls Power, Orchid, Balrampur Chini, BPCL and HPCL were among the big companies that were down today.

Provogue India, Everest Kanto, Punj Lloyd and Adani Power hit new all-time lows.

Triveni Engineering and Pennar Industries counters witnessed big jump in volumes due to block deals.

Pantaloon Retail, Lanco, Suzlon, Spicejet, Pidilite, Sadbhav engineering, Infotech Enterprises, Sintex and WelCorp also saw a spurt in trading volumes.