Markets close on a positive note

The Indian equity markets opened the day on a firm note. However, the markets slipped into red, soon after the Reserve Bank of India (RBI) announced its bi-monthly policy, keeping the key rates unchanged. In the final hour of trade buying activity intensified pushing the indices well above Monday's closing levels. The BSE-Sensex closed higher by 184 points and the NSE-Nifty closed up by 63 points. The small cap and mid cap stocks were in favour today. The BSE Mid Cap and BSE Small Cap indices closed up by 0.82% and 1.12 % respectively. Barring stocks from capital goods sector, all the sectoral indices witnessed buying interest.

As regards global markets, Asian indices closed mixed today while European indices have opened firm. The rupee was trading at Rs 60.86 to the dollar at the time of writing.

Software stocks have closed the day on a mixed note. While Infosys led the gainers; HCL Technologies was among the leading losers. India's software firms are currently at logger heads with the government regarding the tax treatment of profits earned at special economic zones (SEZs). As per the new interpretation by the central board of direct taxes (CBDT), of Section 10AA of the income tax act, employees of software firms will be considered in the scheme of things when assessing claims of tax exemption in SEZs. The CBDT has interpreted the rules to mean that 80% of the workforce of an IT firm should comprise of new employees, on a yearly basis, to qualify for a tax exemption. IT companies have alleged that this rule only pertains to property and machinery and not to human resources. Under the new interpretation, most IT firms will find it almost impossible to claim tax exemptions on the profits earned at SEZs as it will not be possible to shift employees in and out of these SEZs every year.

Majority of power sector stocks closed the day on a firm note, with JSW Energy, NHPC Ltd and Reliance Infrastructure being the leading gainers in the pack. State-run transmission utility Power Grid Corporation of India Ltd (PGCIL) has announced its results for the quarter ended June 2014. During the quarter, the company's net sales stood at Rs 39,384.2 m, higher by 10.8% YoY. Operating income grew to Rs 33,728.6 m, almost in sync with topline growth. Other income rose sharply by 79.9% YoY to Rs 1,332.6 m. At the bottomline level, net profit grew by 9.2% YoY to Rs 11,365.1 m. Net profit margin contracted marginally from 29.2% in 1QFY14 to 28.8% in 1QFY15.

Auto & pharma trade positive
01:30 pm

Indian share markets continued to slip deeper into red in the post-noon trading session after RBI chose to keep rates unchanged. Barring auto, consumer durables and pharma, all the sectoral indices are trading in the red with power and capital goods stocks being the biggest losers.

BSE-Sensex is down 63 points and NSE-Nifty is trading 15 points down. BSE Mid Cap is trading 0.2% up and BSE Small Cap index is trading up by 0.3%. The rupee is trading at 60.88 to the US dollar.

Energy stocks are trading mixed with Gujarat Gas and Oil & Natural Gas Corporation (ONGC) being the major gainers whereas Petronet LNG and Indian Oil Corporation (IOC) are trading in the red. As per a leading financial daily, Petronet LNG would be leasing out its 5 million tonne per annum terminal at Kochi as storage facility for international LNG players. In this regard, the company has received board approval. Kochi terminal's capacity utilization remained a measly 1.4% in the absence of pipeline connectivity. Petronet LNG is likely to lease out the terminal by the third quarter of FY15. According to the company, weak demand in the international gas market has resulted in lower spot prices and therefore international companies want to capitalize on arbitrage opportunities by storing gas now and selling it later when market conditions improve. The company has received interest by more than a dozen companies for utilization of the Kochi facility. In the quarter ended June 2014, Petronet LNG posted a 30% fall in earnings as a result of the dual impact of poor margins from LNG imported at the Dahej terminal coupled with higher depreciation and interest outgo for its Kochi terminal. The company's stock is currently trading down by 4.2%.

Food & tobacco stocks are trading on a mixed note. While Wadala Commodities is trading higher, Golden Tobacco and ITC are leading the pack of losers. As per a leading business daily, diversified major ITC has hiked price of its select cigarettes brands by up to Rs 10 per pack of 10 cigarettes. The price has been increased for brands like Classic and Gold Flakes and the new stocks are likely to hit the market soon. Price for these brands has been revised from Rs 85 to Rs 95 per pack. Even prices for other brands have been raised. The prices have been raised to pass-on the excise duty on cigarettes that were increased in the range of 11% to 72% in the 2014 Union Budget.

RBI leaves interest rates untouched
11:30 am

The Indian stock markets lost their morning gains post the RBI announcing its monetary policy, details of which are discussed below. The BSE-Sensex is currently trading lower by about 15 points or 0.1%, while the NSE-Nifty is trading flat. Stocks from the information technology, automobile and healthcare spaces are the only gainers at the moment. Banking and capital goods stocks were the least preferred by market participants today. The BSE Mid Cap and BSE Small Cap indices were higher trading up by about 0.4% each.

Stock markets in other parts of Asia were trading weak with Japan, China and Hong Kong down by about 0.9%, 0.6% and 0.2% respectively. The rupee was trading at Rs 61.02 to the dollar at the time of writing.

In the first quarter Monetary Policy review today, the RBI kept the key lending rate (repo rate) unchanged. Even the cash reserve ratio stayed at 4%. However, in an effort to ease some liquidity the statutory liquidity ratio (SLR) was reduced from 22.5% to 22%. The RBI's move has come in anticipation of revival in economic activity, fall in consumer inflation and fiscal tightening. If the economic parameters fail to reach RBI's target the central bank may again review its liquidity stance. Meanwhile, it is unlikely that banks will want to bring down the deposit and lending rates too soon. Growth in credit in the near term will therefore largely depend on economic revival as against fall in interest rates.

Stocks from the FMCG space were trading weak with Godrej Consumer, ITC and Dabur being the key losers. Pidilite Industries announced its results for the quarter ended June 2014 recently. The company reported a 20% YoY growth in revenues while profits grew by 5% YoY. Growth in revenues was led by its consumer bazaar business (revenues up 21% YoY; 83% of sales), while its industrial products division grew by 16% YoY. However, the company's margins took a hit, falling to 17.9% from 20.3% earlier largely due to higher input costs. As highlighted by the company's management earlier, the sharp spike in the key input costs (vinyl acetate monomer) was the key reason for the rise in input costs. The effect of the same was however expected to cool down over time as the company was looking at taking certain measures such as price hikes, amongst others, to curb the effect of the same. Further, profit growth would have been higher had it not been for the voluntary retirement scheme payment during the quarter.

Indian share markets open firm
09:30 am

Barring Singapore (up 0.2%), major Asian stock markets have opened the day on a weak note with stock markets in Taiwan (down 1.6%) and Malaysia (down 0.4 %) leading the losses. The Indian share markets have opened the day on a positive note. Majority of the sectoral indices have opened on a firm note with healthcare and FMCG stocks leading the gains. However, realty and capital goods stocks are trading weak.

The Sensex today is up by around 45 points (0.2%), while the NSE-Nifty is up by about 14 points (0.2%). Mid and small cap stocks are also trading in the green with the BSE Mid Cap and BSE Small Cap indices up by around 0.2% and 0.4% respectively. The rupee is currently trading at Rs 60.98 to the US dollar.

Majority of FMCG stocks have opened the day on a firm note, with Marico Ltd and Kokuyo camlin being the leading gainers in the pack. As per the financial daily, Marico is looking to advance its operations in the emerging markets. Reportedly, the company is aiming to double its sales in next four years and will focus more on emerging markets of Asia and Africa to fuel its growth. Categories like hair, food, and wellness products are expected to be the major contributors. The company at present has operations in Bangladesh, Egypt, the Middle East, South Africa, Malaysia and Vietnam, and now it is also looking at expanding in other global geographies. For the upcoming period, the company expects growth from its international market in the range of 14-15%. Currently, international markets contribute approx 16% to the company's top line. Over and above, the company is not looking for any acquisitions in the international markets and will focus on organic growth.

Majority of Indian pharma stocks have opened in green with Aurobindo Pharma and JB Chemicals being the leading gainers. As per the financial daily, Sun Pharma and Ranbaxy Laboratories are expected to control around 40% market for 25 drugs post Ranbaxy's acquisition by Sun Pharma. Reportedly, for nine drugs the market share of the merged entity will be more than 65% and for another 15, the market share will be approximately 60%. In addition, there are 11 drugs in which the Sun-Ranbaxy combine will enjoy a 33-40% market share. In all, the two companies have 128 common formulations. Recently, the Competition Commission of India (CCI) has raised some concerns over the merger. This was largely because the deal is expected to increase market domination by one company. This in turn will impact the prices of essential drugs in the domestic market. Reportedly, the CCI can ask the companies to divest its brands to other players in order to relax the higher control in some categories.

Are we prepared for the QE taper?

The party is over! The days of cheap money may soon end with the Fed on the verge of rolling back the monetary stimulus. While most of the officials have digested this news, the worry part comes now. How would life be post the quantitative easing (QE)?

Quite tough is the immediate answer. For we are heading towards testing times! And to begin with is the expected rise in global interest rates. Yes, the next U.S. monetary policy is likely to see the interest rates rising. And on the back of improving growth prospects in the US, money may find its way back to the US. Hence, the money ought to get dearer now. But what would this mean for India?

Due to the powerful presence of the US dollar in international markets, QE tapering has a direct and immediate impact on the rupee and the domestic scene. In the past, each time U.S. decided to announce QE tapering, the news hit hard as nails to the Indian financial markets. Remember May 2013? The time when U.S. had first hinted to trim the QE program! And we all know what happened next. It sent out tremors in emerging markets. And India was the one that suffered the most. Undoubtedly, the stock markets had tanked too. Engulfed by large fiscal deficit, current account vulnerability and high inflation, Indian financial markets ran into severe panic then. Thanks to the Finance Minister then and the RBI Governor Raghuram Rajan who put together best efforts to curtail current account gap, soften the sticky inflation and commit to fiscal discipline. Therefore, despite the global cues, Indian markets remained fairly immune. But that does not mean that India has no reason to worry. India is yet to see macroeconomic stabilization. Moreover, the interest rate differentials between the global and the domestic markets would put downward pressure on the rupee. This is especially in light of higher probability of the RBI rate cut this fiscal.

Remember the Fed's quantitative easing had led to flush of liquidity in the financial markets of emerging economies that supported the artificial growth there. Even the Indian markets had greatly enjoyed the benefits of excess US dollars in circulation. However, at the peak of global crisis, the growth in these emerging economies appeared to be attractive. Consequently this paved way for irrational exuberance. And in turn gave rise to bubbles distorting the real economy. Very clearly, the asset prices became unnaturally inflated by the cheap money.

Today the world is heading towards the end of easy money era. And high time we need to stand prepared. Also, the world needs to prepare for the higher interest rates as these are expected to pace up much faster than anticipated. And that indeed sounds worrisome.

India needs to be more vigilant about rupee movements and the domestic interest rates. While the regulatory moves on monetary policy will be watched out closely, time will tell how the world deals with the taper.