Markets give up early gains

Wed, 12 Jan 11:30 am

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After starting today's session on a positive note, Indian indices have not managed to hold on to their gains and are currently trading in the red. However, other key Asian markets are trading firm. Currently, heavyweights in the Sensex are trading weak with stocks from the capital goods and healthcare space witnessing selling pressure. However, banking and IT stocks are trading firm.

Currently, the BSE-Sensex is trading down by around 115 points, while the NSE-Nifty is down by about 15 points. Buying interest amongst the mid and small cap stocks is muted as well with the BSE Midcap and BSE Small cap indices trading lower by 0.19% and 0.16% respectively.

Bank stocks are trading firm with Central Bank and Syndicate Bank leading the gains. However, Andhra Bank and Oriental Bank are trading weak. In order to ease the liquidity situation in the system banks have requested RBI to reduce the CRR and SLR ratio. It is believed that the current shortage of funds is primarily due to a mismatch between deposit and credit growth. The credit growth has been over 20% while deposits have grown at much slower pace resulting in a liquidity crunch. As a result most of the banks have raised the deposit rates recently.

However, apart from liquidity concerns inflation is another issue bothering the central bank right now. And managing both of them is a big challenge. If the RBI reduces CRR and SLR to ease liquidity in the system it can fuel inflation which had been hovering in double digits until recently. RBI is supposed to announce its monetary policy on January 25 and the general consensus is that the key policy rates – repo and reverse repo - will be hiked. Thus, liquidity would be even hard for the banks to come by. Hence, the best possible situation for the banks in such a scenario is to raise deposit rates. However, this move is likely to pressurize NIMs.

FMCG stocks are trading mixed with United Breweries and Nestle India trading firm and Hindustan Unilever Limited (HUL) and Tata Global Beverages trading weak. As per a leading financial daily, HUL is planning to launch Astra Gold, a bread spread with high levels of nutritional fats. This is one of the new products being launched by the company to strengthen its food portfolio. Astra Gold will first be launched in Karnataka before it is launched nationwide. HUL's strategy going forward will be to bring the share of its food business closer to its parents'. At present, HUL's foods, beverages and ice cream business contribute 18% to its turnover while foods make up 50% of Unilever's sales. With modern retail taking off, India consumers are now willing to experiment and spend on convenience foods. This is driving up expectations for companies present in this business.