Sensex ends the week up 6%

In what seemed to be a jubilant mood in the Indian stock market the indices had a strong opening today and managed to retain the momentum till the final hours of trade. Metal and auto stocks were particularly in favour. Banking stocks also evinced investor interest after the RBI's rate hike early this week. While the BSE-Sensex closed higher by around 516 points (up 2.9%), the NSE-Nifty closed higher by around 156 points (up 3%). The BSE Mid Cap and the BSE Small Cap indices gained 1.5% and 1% respectively. 10 stocks gained for every decline on the BSE 100 index today.

As regards global markets, other Asian markets also closed higher today while European indices have opened on a negative note. The rupee was trading at Rs 48.8 to the dollar at the time of writing.

The Reserve Bank of India (RBI) on Tuesday deregulated the savings deposit rate, the last administered bank rate in India. The deregulation of the rate is expected to spark off competition among banks to garner low-cost deposits. Typically banks with high CASA (current and savings account) base managed to sustain a higher net interest margin (NIM) during times of high interest rates. This was because a large portion of the deposits came at very cheap rates. Moreover the CASA rate remained fixed irrespective of the level of inflation and rate hikes in lending. However, going forward, sustenance of high margins will be a factor of the bank's market share as well as pricing power. New private sector banks, like Yes Bank and Kotak Mahindra Bank are expected to be more aggressive in pricing savings deposits. As per State Bank Of India (SBI), the hike cost of savings deposits that comprise about 34% of the bank's total deposit base would be around 1% to 1.5%. SBI has the highest CASA base amongst banks in India.

Titan Industries announced the results for the second quarter and half year ended September 2011. The watchmaker registered a sales growth of 48.4% YoY while the net profit was up 39.5% YoY for the half year period. The income for watches recorded a growth of 16.1% YoY. On the other hand jewellery business recorded an income growth of 44.7% YoY. The company had retail chain spanning 737 stores strong, as on 30th September ith a retail area crossing 9.2 lac square feet nationally for all its brands. The company has more than 11,000 dealers across 2,500 towns are involved in retailing of watches.

Metal, realty stocks lead the rally
01:30 pm

The Indian stock market continued to trade firm on account of buying interest in heavyweights during the last two hours of trade. Except for the consumer durables, all sectoral indices are trading in the green. Stocks from the metal, realty, banking and capital goods sectors are leading the pack of gainers.

The BSE-Sensex is trading up by 507 points while NSE-Nifty is trading 157 points above Wednesday's closing. The BSE Mid Cap and BSE Small Cap indices are trading up by 1.4% and 0.9% respectively. The rupee is trading at 48.81 to the US dollar.

Software stocks have been trading mixed with Moser Baer (India), Computer maintenance corporation Ltd (CMC Ltd) and Tech Mahindra leading the pack of gainers. However, Oracle Financial Services Software Ltd (OFSS) and Wipro are trading weak. As per a leading financial daily, attrition rates are declining sharply in the Indian Software sector. Attritions have always been a problem for companies in this sector. However, this declining trend in the attrition level seems to project a cautious view for the sector. According to industry experts, employees are worried due to prevailing uncertainties in the global economic environment. Therefore, they are very cautious with regards to changing jobs. However, some experts feel that the growth in the sector is strong. Hence, the decline in the attritions is not related to the economic scenario.

After the recession when the global economy was recovering, the attrition levels went up because of a very low hiring during the recession. Therefore, the companies had no choice but to poach from each other. However, recent aggressive hiring by the Indian software companies led to some moderation in attrition. According to industry experts, attrition is now at realistic levels of 14-15%. It has still not fallen down to single digit levels. These levels were witnessed during the previous recession.

Auto stocks have been trading mixed as well with Tata Motors, Ashok Leyland and Escorts Ltd leading the pack of gainers. However, Maruti Suzuki and Eicher Motors are trading weak. As per a leading financial daily, demands for cars would witness their lows after the festive season. This would happen on account of constant hikes in interest rates as well as high petrol prices. According to the people in the industry, the demands have not been encouraging even during the festive season. The people are postponing their plans to buy a car. Enquiry levels at the dealerships are going down. It is expected that demand would only get worse in the near future to a situation where deep discounts and other promotional freebies would be of much help. As per the bankers, there is a very high chance that banks would increase the interest rates in the wake of recent key rate hikes. With the interest burden going up for home loan borrowers, disposable incomes at the hands of buyers are going down. All this spells a bad time ahead for the car companies.

Markets continue to trade firm
11:30 am

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

The BSE-Sensex is trading up by 459 points and NSE-Nifty is trading up by 148 points. BSE Mid Cap and BSE Small Cap indices are trading higher by 1.2% and 1% respectively. The rupee is trading at 48.82 to the US dollar.

Automobile stocks are trading firm led by Tata Motors and Hero Motocorp. According to a leading financial daily, Maruti Suzuki is gearing up to set a new plant either in Gujarat or Maharashtra. The auto company is planning a 1,000 acre plant with a capacity of rolling out 2 m cars annually. The total investment outlay for the same is expected to be Rs 180 bn, including Rs 60 bn for auto ancillary unit. It will be a phased investment. Initially, Rs 60 bn will be invested to produce 0.1 m cars. Final decision is expected from the management by the end of this month.

FMCG stocks are trading strong. All stocks in the sectoral index are trading in the green. Paper Products and Camlin are the biggest gainers. According to a leading financial daily, Colgate is planning an investment of Rs 2 bn in Gujarat. This will be towards setting up a new plant in the state. The FMCG company is considering a industrial estate in Sanand (near Ahmedabad) as the location of the plant. This industrial estate is being developed by state-run Gujarat Industrial Development Corporation (GIDC). It may be noted that Colgate has existing manufacturing facilities at Aurangabad, Baddi (Himachal Pradesh), Hyderabad and Kundaim (Goa).

European deal boosts markets
09:30 am

Asian stock markets have opened the day on a firm note following some temporary relief as far as the European debt crisis is concerned. Stock markets in Hong Kong (up 1.9%), China (up 1.1%), Japan (up 0.9%) and Singapore (up 0.7%) are leading the gains. The Indian stock market have opened the day on a strong note. Stocks in the metals and IT space are leading the gains.

The BSE-Sensex is trading higher by 521 points (3%) and the NSE-Nifty is up by around 155 points (3%). BSE Midcap and BSE Small cap stocks are trading in the green, with the BSE Mid Cap and BSE Small Cap indices up by 1.2% and 0.8% respectively. The rupee is trading at 48.87 to the US dollar.

Banking Stocks have opened the day on a firm note with State Bank of India (SBI) and Bank of Baroda in the green. India's largest PSU bank, SBI will be the biggest beneficiary of the recapitalisation program for banks by the government. SBI will be eligible to get Rs 80 bn in the current financial year. The amount will be given to SBI through various forms including preferential shares. This will help SBI to increase the capital base and it will also be able to plan its follow-on public offer (FPO). The FPO is most likely to hit markets in the next fiscal year. This effort by the government to capitalise PSU banks is to adhere to the 9% Tier-I capital under Basel-III norms. These norms are supposed to be implemented between 2013 and 2019.

Power stocks have opened the day on a firm note with Power Grid Corporation of India Ltd (PGCIL) and National Thermal Power corporation (NTPC) leading the gains. As per a top company official, state-run PGCIL is aiming to achieve 30-40% growth in the telecom business in the current financial year 2011-12. During FY11, the telecom business had contributed about Rs 1.9 bn, which was 2% of the company's total revenue. PGCIL had ventured into the telecom business a few years ago. It has a telecom network of about 21,000 km optic fibre cable providing connectivity to all the metros, major cities and towns, apart from some presence in remote areas. Of over one lakh towers that the company owns, it has so far leased 800 towers and has floated tenders for another 30,000.

Are we heading towards mild stagflation?

As expected, there was no respite from rate hikes when Reserve Bank of India (RBI) announced the monetary policy on Tuesday (25th Oct, 2011). This was the 13th hike since March 2010. Considering stubborn inflation, RBI had no choice, but to increase the interest rates. After all, the prime objective of RBI is to stabilize inflation within a limit. However, all these efforts have not yet given any positive results so far. On the other hand, they seem to be damaging the growth prospects of the Indian economy.

Earlier our economy was facing inflationary pressure only. But now it is facing a bigger threat. The threat of mild stagflation! In simple terms, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down. This is what we are facing now. In its monetary policy review for second quarter FY12, RBI indicated that the Indian economy is clearly seeing slowing growth. Various factors such as anti-inflationary stance of monetary policy and the significant slowdown in investment activity are curbing the growth momentum of the Indian economy.

Now policy makers are facing a bigger dilemma. If they continue to fight inflation the way they were doing for the last one year, it is bound to damage the investment sentiment as it would make new investments less attractive at higher interest rates. However, if they decide to pause now, inflation may go out of control.

Is there any way forward? For that we need to look into why all efforts put by the apex bank to curb the stubborn inflation have failed. It happened mainly due to two reasons. First, the much-talked-about supply side constraints. And the second, the creation of excessive demand, well supported by different government schemes such as subsidies. Hence, the fiscal policy has been totally out of sync with the main objectives of monetary policy.

Now the time has come for both the Indian government and the monetary policy makers to work together. The government especially needs to refrain from creating excessive demand. Rather, it should work on policies to lessen the supply side constraints in our economic system. But more importantly, the government must put concerted efforts to curb the widening fiscal deficit gap.

Else, sooner or later, we would be facing more heat of stagflation.