Optimism over Europe fuels gains

Indices in the Indian stock market remained range bound during the final hours of the trading session. However, strong gains witnessed during the earlier part of the day were enough to make them close on a very buoyant note. Thus, while BSE-Sensex edged higher by around 440 points, gains on the NSE-Nifty came in at close to 140 points (up 2.9%). Gains in the BSE Mid Cap and BSE Small Cap indices were slightly lower as both of them notched up close to 1% gains. Only one Sensex stock closed the day in the negative.

Most other Asian indices also closed on a positive note whereas Europe too is trading mostly in the red currently. The rupee was trading at Rs 49.2 to the dollar at the time of writing.

The sudden turn in sentiments today was caused by speculation doing the rounds that Europe will do all that it takes to protect its banking system from the Greek crisis and also the failure of other indebted nations. What also helped matters was the fact that the Bank of England boosted its asset purchase program by more than 33% to 275 bn pounds. Whether all these measures end up boosting the economies of these regions remains to be seen. With the evidence at hand though, the likelihood of such a possibility remains on the lower side.

Tata Motors emerged one of the top gainers in the markets today as it edged higher by around 8%. While the overall bullish sentiment no doubt helped, what also attracted investor interest were the company's launch of the Tata Manza sedan and the international Tata Prima range of premium commercial vehicles in the South African market. The company sees Africa as a region of tremendous potential and the most recent launches will serve to further strengthen the Tata brand in these markets. The company also exhibited a wide range of other vehicles laden with latest technologies.

Today's optimism did not quite rub off on cement major Ultratech as the stock closed nearly 1% lower on the bourses today. The pessimism seemed an outcome of the poor sales performance of the company for the month of September. As per reports, the company's September sales reported a fall of 3% over same month last year. Amongst other things, the sales were hit by the ongoing agitation over the Telangana issue in the southern state of Andhra Pradesh. On a sequential basis, the drop was nastier, going down by 10% YoY. The cement industry is going through some tough times currently as not only is there an oversupply type of a situation, the demand is also not rising as fast as one would expect on account of rise in interest rates and inflation.

Metal, banking stocks lead markets
01:30 pm

The Indian stock market continued to trade firm on account of strong buying interest in heavyweights. All sectoral indices are trading in the green. Stocks from the metal, banking, realty, consumer durables and software space are leading the pack of gainers.

The BSE-Sensex is trading up by 443 points while NSE-Nifty is trading 138 points above wednesday's closing. The BSE Mid Cap and BSE Small Cap Cap indices are trading up by 1.3% each. The rupee is trading at 49.19 to the US dollar.

Banking stocks have been trading firm with IDBI Bank, Syndicate Bank, Allahabad Bank and Indian Overseas Bank leading the pack of gainers. As per a leading financial daily, banks would not be able to achieve the revised target of 18% credit growth for the current financial year set by Reserve Bank of India (RBI). RBI had already lowered the target from 19% to 18% in its first quarter review in the month of July. In the light of the downward revisions of country's Gross Domestic Product (GDP) growth rates, industry experts are estimating a credit growth of around 16% with downward bias. According to the data released by RBI, bank credit has witnessed a growth of just 3.92% in the first six months of the current fiscal year. Banking officials are also saying that in the current economic scenario, it is difficult to achieve the earlier set target of credit growth. However, according to some banks such as IDBI, they are keeping lower credit growth target as a part of their strategy. They want to focus more on current account and savings account.

One of the biggest reasons for the slower credit growth is being attributed to shifting of fund raising activities of the corporate from banks to private placement of bonds. Since bank interest rates are high, corporate are looking for cheaper source of funds.

Energy stocks have been trading mixed with Reliance Industries Ltd (RIL), Essar Oil, and Mangalore Refinery and Petrochemicals Ltd (MRPL) leading the pack of gainers. However, Petronet LNG and Gujarat State Petronet are trading weak. As per a leading financial daily, RIL would continue to supply natural gas to four fertilizers plants in Uttar Pradesh. The company had recently served a notice to the plants of Indo Gulf Fertiliser, Indian Farmers Fertiliser Co-operative Limited (IFFCO), Kribhco Shyam Fertilisers and Tata Chemical for the suspension of gas supplies from today. However, now the company is saying that it would work out with these companies to resolve the issues providing financial guarantees in form of letter of credits to cover for liability arising from levy of local sales tax on gas sales. RIL has withdrawn the suspension notice after getting assurances from Director General, Fertiliser Association of India that the matter would be resolves soon. However, RIL has retained the right to suspend the supplies without any further notice.

Markets continue to trade firm
11:30 am

Indian stock market indices have been trading firm over the last two hours of trade on the back of buying interest in index heavyweights. All sectoral indices are trading in the positive led by Metal and Banking stocks.

The BSE-Sensex is trading up by 465 points and NSE-Nifty is trading up by 145 points. BSE Mid Cap and BSE Small Cap indices are trading higher by 1.9% and 1.8% respectively. The rupee is trading at 49.09 to the US dollar.

Textile stocks are trading firm led by Bombay Dyeing and Raymond. According to a leading financial daily, Arvind Ltd is planning to set up 240 exclusive brand outlets by 2013-14. With this, the company expects to clock in revenues of Rs 4 bn. The company intends to set up these brand outlets in three formats- flagship stores in 2,500 sq ft; experience stores occupying less than 2,500 sq ft and exclusive stores covering less than 900 sq ft. As per the company, experience stores will contribute maximum revenues for the textile company. These experience stores would be set up in tier 2, 3 and 4 cities and towns of India.

Steel stocks are trading strong. All stocks in the sectoral index are trading in the green. Jindal Steel and Power Ltd (JSPL) and SAIL are the biggest gainers. According to a leading financial daily, Steel Authority of India (SAIL) will soon be allotted an iron ore lease in Karnataka's Bellary district for its Visvesvaraya Iron and Steel Ltd (VISL) plant. The iron ore mine is located in the North East Block range in Sandur and is estimated to have 11 m tonnes of iron ore. The granting of lease would end SAIL's seven year wait for a captive mine. Currently, VISL sources its raw material from NMDC which is not sufficient to meet its requirement and getting supplies from SAIL's mines in Jharkhand, more than 2,500 km away, is also not a viable option as freight cost alone is too high. SAIL wants to expand the capacity at VISL but will do so only after the allocation of mine.

Indian stock markets open strong
09:30 am

Asian stock markets have opened the day on a firm note. Stock markets in Hong Kong (up 3.6%), South Korea (up 3.1%) and Indonesia are leading the pack of gainers. However, markets in China (down 0.2%) are facing selling pressure. The Indian stock market have opened the day on a firm note. Banking, IT and metal stocks are leading the gains.

The BSE-Sensex is trading higher by around 478 points (3%) while the NSE-Nifty is up by around 147 points (3.1%). Mid cap and Small cap stocks have opened on a positive note as well with BSE Mid Cap and BSE Small Cap indices up by 2.3% and 2.2% respectively. The rupee is trading at 49.02 to the US dollar.

Capital goods stocks have opened the day on a firm note with Suzlon Energy and Jain Irrigation trading in the green. State-owned power equipment manufacturer, Bharat Heavy Electricals Ltd (BHEL) said that it has bagged an order of Rs 38 bn from Dainik Bhaskar Power Ltd (DBPL). The order pertains to the setting up of 1,320 MW thermal power plant which will be located in Madhya Pradesh. DBPL is an independent power producer in Madhya Pradesh and the deal is valued at Rs 37.8 bn. BHEL is already executing one contract for DBPL which involves supply and commissioning of a 2x600 MW BTG (boiler, turbine and generator) package for a power project in Chhattisgarh. The state-owned firm has the capability to deliver 15,000 MW worth power equipment every year and the company is in the process of increasing its capacity to 20,000 MW per year.

Auto stocks have opened the day on a firm note with Tata Motors and Maruti Suzuki leading the gains. India's leading car manufacturer, Maruti Suzuki had reported a sharp decline of 24% in production during the July-September quarter. In fact, this was the steepest decline in the company's 29-year history. The main reason for this was the disruption in production caused by labour unrest at Maruti's Manesar plant. However, the company is now gearing up to register record sales during the festive month of October. The company has set a production target at 30-40% higher. Due to the lower production in the previous few months, the company's backlog of bookings has increased substantially. Maruti is planning simultaneous production at its Manesar and Gurgaon plants with the aim of not only meeting the backlog of bookings but also to meet the higher festive demand.

How to achieve fiscal prudence?

Fiscal prudence has always been a key agenda of the budget announcement speeches that happen every year. During the recent annual budget, government had laid out a deficit target of 4.6% (as a percentage of GDP) for the current fiscal. However, finance minister Pranab Mukherjee, recently voiced his opinion that it would be difficult to meet the envisioned target for the year. While revenue is suffering due to falling tax receipts, the expenditure has been on a steady rise due to increasing investments in infrastructure.

Fall in tax revenue due to slowing economic growth and redemption from the state run deposit plans will force the government to increase market borrowings. It may be noted that savings in state run deposit plans are used to fund public expenditure. And withdrawal of these savings typically results in liquidity crunch. As a result, the government is planning to sell more debt to raise money. However, increase in market borrowings can threaten the nation's debt rating and may also crowd out private investments. Hence, the government has to be really vigilant here.

As far as the widening deficit issue is concerned, we believe that subsidies doled out by the government have been a prime culprit here. Priority sectors like oil and fertilizers are given huge subsidies which effectively creates a hole in the pockets of the government. However, the ministry is taking calibrated steps to deregulate these sectors. But considering the vote bank politics involved here, we believe it would take long before we see free market pricing in these subsidized sectors. And once that concludes, it would become comparatively easier for the government to manage its deficit targets.

Apart from eliminating subsidies, increasing tax rates is another tool at the government's disposal. However, increasing tax rates at a time when the common man is reeling under the pressure of inflation would not be a populist measure. Cutting expenditure is another area which can be explored. However, considering that our expenditure is predominantly on public goods like infrastructure, unlike on social security measures as in the west, the area for reduction is miniscule.

Thus, we believe that there is very little room for improvement on both revenue and expenditure front as far as government finances is concerned. Unless we gain consensus in bringing an end to the subsidy era, the fiscal woes will continue to linger.