Contributed by Keynote Capitals

Date: January 28, 2011

The key benchmark extended losses to hit fresh 4-1/2-month lows in mid-afternoon trade as European stocks dropped in early trade. Data showing heavy selling by foreign funds on Thursday, 27 January 2011, and fears of more rate hikes from the Reserve Bank of India to tame inflation, also weighed on the sentiment. The BSE 30-share Sensex was down 363.75 points or 1.95%, off close to 405 points from the day’s high. The 50-unit S&P CNX Nifty regained 5,500 after falling below that mark in mid-afternoon trade.

Index heavyweight Reliance Industries (RIL) lost over 2%. Interest rate sensitive realty and auto stocks slumped. Consumer durables stocks also declined. The market breadth was extremely weak.

Volatility was high right from the onset of the trading session as the market slipped into the red after a positive start. The market instantly moved into the green again. The market soon lost ground. The market weakened once again after recovering sharply from 4-1/2-month lows in morning trade. The market slumped to hit fresh 4-1/2-month low in mid-morning trade. The market weakened once again after recovering from 4-1/2-month lows in early afternoon trade. The market extended losses in afternoon trade. The market hit a fresh 4-1/2-month low in mid-afternoon trade.

As per provisional figures foreign funds sold shares worth Rs 1651.41 crore and domestic funds sold shares worth Rs 255.59 crore on Thursday, 27 January 2011. Foreign funds have dumped shares worth a net Rs 7276.37 crore in this month, as per data from the stock exchanges. Domestic funds have absorbed a part of the selling from foreign funds, with a inflow of Rs 4147.78 crore.

The results announced so far showed that the combined net profit of a total of 645 companies rose 20.2% to Rs 47255 crore on 20% rise in sales to Rs 398717 crore in Q3 December 2010 over Q3 December 2009.

European equities dropped on Friday, pressured by mining shares, with investors staying cautious ahead of the release of US gross domestic product data that is expected to set near-term market direction. The key benchmark indices in France, Germany and UK fell by between 0.04% to 0.67%.

Japanese shares led decline in most of the Asian stocks on Friday, 28 January 2011, after Standard & Poor’s on Thursday cut Japan’s credit rating. The key benchmark indices in Hong Kong, Indonesia, Japan, Singapore and South Korea fell by between 0.34% to 1.44%. The key benchmark indices in China and Taiwan rose 0.04% and 0.47% respectively.

Standard & Poor’s on Thursday cut Japan’s long-term sovereign credit rating to AA minus from AA, and reaffirmed the short-term ratings at A-1 plus. It said in a statement that it expects Japan’s fiscal deficits to remain high in the next few years, which will further reduce the government’s already weak fiscal flexibility. It said its outlook on the long-term rating is stable, reflecting its view that Japan’s strong external balance sheet and monetary flexibility partially offset the pressures stemming from the fiscal side.

Trading in US index futures indicated that the Dow could fall 25 points at the opening bell on Friday, 28 January 2011. Strong corporate earnings took US stocks to a 29-month closing high for a second day on Thursday. Weekly initial jobless claims surged to the highest level since late October while factory orders fell unexpectedly in December, the latest US government data showed. Moody’s warned that it might turn negative on the US rating outlook if the deficit continued to swell.

Back home, the food price index rose 15.57% and the fuel price index climbed 10.87% in the year to 15 January 2011, government data on Thursday showed. In the prior week, annual food and fuel inflation stood at 15.52% and 11.53%. The primary articles price index was up 17.26% in the latest week, compared with an annual rise of 17.03% a week earlier.

RBI deputy governor Subir Gokarn on Thursday, 27 January 2011, said the bond yield curve was reflecting the inflation expectations and there was no need to revisit the statutory liquidity ratio. The effect of policy actions taken by the Reserve Bank of India in the past is yet to be fully seen, he said. But, RBI Governor D Subbarao said demand side pressures were abating due to monetary policy actions.

To control surging inflation, the Reserve Bank of India (RBI) at its quarterly policy review on Tuesday, 25 January 2011, raised repo rate by 25 basis points to 6.5% and the reverse repo rate by 25 basis points to 5.5%. Repo rate is the rate at which the RBI lends money to banks. Reverse repo is the rate at which RBI borrowsfunds from banks. The central bank held the cash reserve ratio steady at 6%.

As high food inflation persists, the prospect of it spilling over to the general inflation process is rapidly becoming a reality, ReserveBank of India (RBI) Governor Subbarao said in the policy document released on Tuesday, 25 January 2011. The RBI lifted its headline inflation projection for March 2011 to 7% from 5.5% previously. Thecentral bank said inflation is likely to resume its moderating trend in the first quarter of 2011-12. The RBI stuck with its 8.5% GDP growth forecast for the current fiscal year, but with an upside bias.

The combined risks from inflation, the high current account deficit (CAD) and fiscal situation contribute to an increase in uncertainty about economic stability that consumers and investors will have to deal with, RBI said. To the extent that this deters consumption and investment decisions, growth may be impacted. While slower growth may contribute to some dampening of inflation and a narrowing of the CAD, it can also have significant impact on capital inflows, asset prices and fiscal consolidation, thereby aggravating some of the risks that have already been identified, it said.

Capital flows, which so far have been broadly sufficient to finance the CAD, may be adversely affected, the RBI said. Faster than expected global recovery may enhance the attractiveness of investment opportunities in advanced economies, which may impact capital flows to India. This may increase the vulnerability of India’s external sector. Hence, the composition of capital inflows needs to shift towards longer-term commitments such as foreign direct investment (FDI), the RBI said.

At 14:20 IST, the BSE 30-share Sensex was down 363.75 points or 1.95% to 18,320.68. The index lost 369.38 points at the day’s low of 18,315.05 in mid-afternoon trade, its lowest level since 6 September 2010. The index gained 38.69 points at the day’s high of 18723.12 at the onset of the trading session.

The S&P CNX Nifty was down 102.85 points or 1.84% at 5,501.45. The Nifty hit low of 5,485.35 in mid-afternoon trade, its lowest level since 6 September 2010.

The BSE Mid-Cap index fell 3.61% and the BSE Small-Cap index slumped 4%. Both these indices underperformed the Sensex.

The market breadth, indicating the health of the market, was weak. On BSE, 2446 shares declined while 400 shares advanced. A total of 71 shares remained unchanged.

Among the 30-member Sensex pack, 24 declined while the rest rose. Bhel, Hindalco Industries and Jaiprakash Asociates fell by between 3.81% to 4.45%. ONGC, Wipro and HDFC Bank rose by between 0.48% to 1.46%.

Index heavyweight Reliance Industries (RIL) lost 2.55%. RIL said during market hours on Thursday, 27 January 2011, it along with IL&FS will develop a model economic township at Jhajjar, Haryana.

The RIL stock has fallen recently on concerns about slow ramp up in gas production from the KG-D6 field. Gross natural gas production from RIL KG-D6 block, off India’s east coast, declined 5.7% to 55.8 million metric standard cubic metres per day (mmscmd) in Q3 December 2010 from Q2 September 2010, as the company continues to struggle to find solution to problems related to the reservoir.

RIL’s net profit rose 28.14% to Rs 5136 crore on 5.15% rise in net turnover to Rs 59789 crore in Q3 December 2010 over Q3 December 2009. Higher refining and petrochemicals margins boosted the performance. RIL’s gross refining margin (GRM) improved to $9 per barrel in Q3 December 2010 from $5.9 per barrel in Q3 December 2009. The GRM was also higher compared to $7.6 per barrel in Q2 September 2010. The result was announced after trading hours on Friday, 21 January 2011.

Auto shares declined across the board on worries higher interest rates and increase in vehicle prices could dent demand for vehicles, whose sales are mostly driven by borrowed funds. India’s largest tractor maker by sales Mahindra & Mahindra slumped 6.64%.

Tata Motors, Maruti Suzuki India, Hero Honda Motors, and Bajaj Auto declined by between 2.3% to 5.08%.

Interest rate sensitive realty stocks declined for the third straight day on concerns higher interest and higher property prices may dent demand for residential units. DLF, Indiabulls Real Estate, Unitech and HDIL fell by between 3.98% to 8.97%.

Consumer durables stocks extended recent losses. Titan Industries, Rajesh Exports, Videocon Industries and Gitanjali Gems fell by between 2.34% to 5.48%.

Blue Star slumped 11.82% after net profit declined 47.19% to Rs 22.36 crore on 3.52% rise in net sales to Rs 606.83 crore in Q3 December 2010 over Q3 December 2009.

SpiceJet fell 8.73% after net profit declined 13.31% to Rs 94.45 crore on 26.62% rise in net sales to Rs 819.99 crore in Q3 December 2010 over Q3 December 2009.

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