Small and mid-caps buck the trend

The Indian stock markets started the day on a positive note. However this momentum could not be sustained for very long. Soon the indices turned choppy and moved below the dotted line. Finally indices closed lower ahead of the market holiday tomorrow. The market breadth was still positive with 1.4 advances to every decline. The BSE-Sensex closed in the negative, lower by around 46 points (down 0.3%). The NSE-Nifty also closed lower by around 10 points (down 0.2%). The smaller indices had a better day on the bourses. The BSE Mid Cap index and the BSE Small Cap closed 0.9% and 0.7% higher respectively in trade today. PSU stocks, capital goods and power stocks saw a bulk of the gains today. Oil and gas and IT stocks were the losers in today's trade.

As regards global markets, Asian indices had a negative outing today. European indices opened the day on a weak note. The rupee was trading at Rs 54.08 to the dollar at the time of writing.

Retail inflation numbers (as measured by the CPI) were released today, a day after the RBI announced its mid-quarterly policy review and expressed its concerns over the high inflation levels. The CPI increased to 10.03% for the month of August as compared to 9.86% in the previous month. The rise was led by soaring prices of vegetables - with an approximate increase of 21% YoY. The CPI for food and beverages section increased by 12.03%, while clothing, bedding and footwear rose by about 10.7%. Retail inflation in rural India rose to 9.9% from 9.76% a month ago, while that in urban India increased to 10.19% from 10.1%.

India's state electricity boards (SEBs) face huge transmission and distribution (T&D) losses. These utilities have been in the red for a number of years now due to the lack of periodic tariff revisions and the escalating costs of fuel. As a result, these boards have accumulated losses of at least Rs 2 trillion. Banks, especially public sector banks have unfortunately been funding these losses. A large portion of this debt has already been restructured in FY12; with a few more pains expected this year as well. The central government is now preparing a much-awaited debt recast package for these cash-strapped SEBs that will be sent to the cabinet for approval in a couple of weeks. However this will not be in the form of a bailout package. The restructuring will involve modifying the repayment schedule of debt owed by state electricity boards. On the back of this development a number of PSU banking stocks, especially the ones with significant exposure to these SEBs rallied. Oriental Bank closed 13% higher, Union Bank (10%) and Punjab National Bank (7%) all shot up post this development.

Indian share markets weaken
01:30 pm

On account of selling in index heavyweights, Indian share markets slipped below the dotted line in the post-noon trading session. Majority of the sectoral indices are trading positive with power, capital goods and FMCG stocks leading the pack of gainers. Oil and gas, metal and IT are among the few sectors trading weak.

BSE-Sensex is down 28 points and NSE-Nifty is trading down 7 points. BSE Mid Cap is up 0.9% and BSE Small Cap is up 0.8%. The rupee is trading at 54.2 to the US dollar.

Majority of cement stocks are trading positive with India Cement and Shree Cement leading the pack of gainers. As per a leading financial daily, Reliance Infrastructure has forayed into the commercial cement manufacturing with its subsidiary Reliance Cement Company Pvt Ltd launching Reliance Cement. The new-age Portland Pozzollona cement will be manufactured in the recently commissioned plant in Butibori, Maharashtra. The cement from the plant will initially service the demand of the Vidarbha market including districts of Nagpur, Wardha, Chandrapur, Bhandara and Amravati. The marketing and distribution networks to the other districts will be set up subsequently.

Majority of the engineering stocks are trading strong with Jyoti Structure and Bharat Heavy Electricals (BHEL) being the biggest gainers. A leading business recently reported that power equipment manufacturer BHEL is looking at opportunities to grow its non-power business. This development comes on the back of the possibility of cancellation of Rs 210 bn worth of orders following the coal mine allotment controversy. It is believed that the power companies involved in the issue have asked the company to put their orders on hold, thereby impacting the capital goods major. As per BHEL's managements, the exact extent of order cancellations would be known by next month. The company would now be looking at enhancing its industrial, transportation, piping, refinery and transmission and distribution businesses. These businesses are believed to form nearly 30% of the company's revenues. BHEL's management is looking at aggressively increasing the share of the non-power business segment such that the power business would form about 40% of revenues a few years down the line.

Indian equity markets trade flat
11:30 am

Indian equity markets shed initial gains and traded flat during the last two hours of trade. Barring, energy, metal and auto stocks, all sectoral indices traded firmly.

The BSE-Sensex and NSE-Nifty are both trading flat. BSE Mid Cap and BSE Small Cap indices are currently up by 1% and 0.7% respectively. The rupee is trading at 54.27 to the US dollar.

IT stocks are trading strong led by HCL Infosys and Infosys Limited. According to a leading financial daily, Tech Mahindra acquires a 51% stake in Comviva Technologies which is a Bharti group owned mobile Value Added Service (VAS) provider. For acquiring this, Tech Mahindra will be spending Rs 2.6 bn. The new entity formed will be named Mahindra Comviva in which Bharti group would hold 20% equity apart from Tech Mahindra's 51%. Remaining stake will be held by private equity investors and employees. Tech Mahindra will make an upfront payment of Rs 1.25 bn while the balance will be paid over 5 years. With this, Tech Mahindra has entered into the space of mobility products.

Aluminium stocks are trading in the red led by Hindalco and National Aluminium Company Limited (Nalco). According to a leading financial daily, Hindalco Industries has achieved financial closure for Rs 98 bn debt for its greenfield smelter project at Lapanga in Odisha in one of the largest syndication in recent times. The project having total cost of Rs 131 bn has a debt equity ratio of 75:25. The debt is priced at 1.25% higher than State Bank of India's (SBI) base rate and has a tenor of 12.5 years. The rate currently works out to be 11.25% per annum. The Aditya Aluminium smelter has a proposed aluminium production capacity of 359,000 tonnes backed by captive power plant of 900 megawatt (MW). The plant is expected to be among the lowest cost producers globally. The company has in recent months successfully tapped both the domestic bond market as well as the loan market to meet its financing needs.

Indian share markets open firm
09:30 am

Most major Asian stock markets have opened the day on a weak note with markets in China (down 0.6%), Indonesia (down 0.4%) and Japan (down 0.3%) leading the losses in the region. The Indian share market indices have opened the day in the green. Stocks in the power and healthcare space are leading the gains. However, metal stocks are trading weak.

The Sensex today is up by around 24 points (0.1%), while the NSE-Nifty is up by around 3 points (0.1%). Mid and small cap stocks are also trading in the green with the BSE Mid Cap and BSE Small Cap indices up by around 0.6% and 0.2% respectively. The rupee is trading at Rs 54.24 to the US dollar.

Auto stocks have opened the day on a mixed note with Bajaj Auto, Mahindra & Mahindra (M&M) and Ashok Leyland trading firm. However, Tata Motors and Hero MotoCorp are facing selling pressure. As per a leading financial daily, Tata Motors witnessed a 13% year-on-year growth in its global vehicle sales during the month of August 2012. During the month, the company sold about 97,225 units. This includes sales from its subsidiary Jaguar Land Rover (JLR). During August 2012, the standalone sales of JLR increased by 13% YoY to 24,060 units. While global sales of Jaguar during the month were 2,960 vehicles, sales of commercial vehicles including Tata, Tata Daewoo and Tata Hispano Carrocera range increased 4% to 50,084 units. On the other hand, global sales of passenger vehicles shot up by 23% YoY to 47,141 units in August 2012.

Indian pharma stocks have opened the day on a firm note with Natco Pharma, Strides Arcolab and IPCA Labs leading the gains. As per a leading financial daily, India's second largest drug manufacturer, Cipla, is in talks with International Planned Parenthood, a London-based organisation that promotes sexual and reproductive health, to expand its contraceptive pills market. The company has held preliminary talks for supplying drugs in Africa and South Asian countries as well as collaborating in research in the contraceptives segment. It must be noted that some of the company's contraceptive drugs are approved by the World Health Organization. Cipla's strategy to market contraceptive drugs in developing countries is in line with the demands of non-government organisations (NGOs) and aid groups, such as International Planned Parenthood Federation (IPPF).

What Subbarao's silence says?

The Reserve Bank of India (RBI) kept its key policy rate (repo rate) unchanged in the mid quarter monetary policy review. Though Cash Reserve Ratio (CRR) was reduced by 25 bps (0.25%) and the general consensus is that rate cycle has reached its peak, RBI seems to be in a no hurry to cut rates. That's because of worries pertaining to inflation.

The inflation figure for the month of August stood at 7.55%, up from 6.87% in July. This should ring in alarm bells as the 7.55% figure was reported on a high base of 9.78% that was prevalent in August last year. Secondly, core inflation (inflation excluding crude and food prices) was also up by 0.8% in the month of August. This is the most worrying factor as even after eliminating the effect of most volatile products (crude and food) inflation did not show any signs of receding. This depicts that manufacturing inflation is still not under firm control.

Further, the recent fuel price hike is expected to make the matters even worse. A hike in diesel prices is likely to stoke fuel inflation. As transportation costs increase, prices of essential vegetables/fruits are bound to rise. And this will stoke food inflation. Further, spectrum refarming and re-allocation of coal blocks may result in increasing tariffs of telecom services and power. Also, capping LPG cylinders per household will hurt common the common man.

Thus, it seems that the real impact of inflation is yet to re-surface. And Subbarao's silence in keeping the policy rates intact is a testament to that fact. Though the current set of reforms (easing norms for FDI in retail and aviation) were welcomed by the market with a big cheer, however the inflation monster is still ruling high. So, while one may be right in thinking that the rate cycle has peaked assuming that RBI may turn dovish soon can turn out to be an illusion.