Indian benchmarks regain sanguine momentum; head towards day’s high

Resilient Indian equity markets are displaying optimistic trends in Thursday afternoon trades as the benchmarks have regained the momentum lost in late morning session after the Supreme Court, in a major development having implications for the India’s corporate sector, cancelled the 122 2G spectrum licences granted by former telecom minister A Raja on the ground that they were issued in a 'totally arbitrary and unconstitutional' manner. Post hitting session’s lows on the back of Supreme Court’s judgment, the benchmarks have managed to recuperate swiftly and are headed towards the psychological 17,500 (Sensex) and 5,300 (Nifty) levels. The recovery was led by heavyweight banking stocks which fell as investors worried over their exposure to telecom companies. Among the telecom companies, Unitech, Reliance Communications, DB Realty, Videocon, Tata Teleservices were badly hit on their licences being cancelled while Bharti Airtel rallied around seven percent as barring it, almost all other telecom stocks were granted licences post 2008. Besides, heavyweight PSU stocks like ONGC and BHEL rallied in the session on the buzz that an empowered group on ministers (EGoM) is likely to consider later in the day 5% stake divestment in the companies via auction. On the global front, investors’ morale got underpinned after stronger than expected manufacturing reports from the global growth engines viz. China and India along with upbeat factory activity data from developed economies like the US and EU, spurred hopes that a recovery could be back on track. All markets from the Asian space were notably higher while European stock futures advanced, indicating the markets there would extend the gaining momentum.

Moreover, the broader markets too traded on positive note with around half a percent gains but were outclassed by their larger peers. The bourses climbed on good volumes of over Rs 0.50 lakh crore while market breadth on BSE was in favor of advances in the ratio of 1384:1172 while 118 scrips remained unchanged.

The BSE Sensex is currently trading at 17,451.63 up by 151.05 points or 0.87% after trading as high as 17,504.25 and as low as 17,308.28. There were 22 stocks advancing against 8 declines on the index.

The broader indices were trading on a positive note; the BSE Mid cap index rose 0.39% and Small cap climbed 0.50%.

On the BSE sectoral space, TECk up 2.15%, Power up 1.65%, IT up 1.55%, Capital Goods up 1.51% and Metal up 1.45% were the major gainers while Consumer Durables down 0.33% and Healthcare down 0.24% were the only losers in the space.

Bharti Airtel up 6.56%, Sterlite up 3.52%, BHEL up 3.24%, Tata Power up 2.77% and DLF up 2.44% were the major gainers on the Sensex, while SBI down 1.88%, Cipla down 1.32%, ITC down 0.79%, Tata Motors down 0.72% and Sun Pharma down 0.64% were the major losers in the index.

Meanwhile, with the Union Budget on the anvil, the RBI Governor, Duvvuri Subbarao has emphasized the need to cap fiscal deficit for economic stability. Without being specific to the Indian government’s borrowing, the Governor said that beyond a point, borrowings militate against growth. Therefore it is important that fiscal deficit be maintained at the right levels of GDP. Moreover, the Government needs to spend these funds on merit goods and public goods, particularly on building physical infrastructure and improving human and social capital rather than on unproductive current expenditure.

The RBI Governor further emphasized that as countries, we need to learn from the Euro zone crisis.  Greece, Portugal, Italy and Spain and many other euro zone countries were on the brink of defaulting on their loans, as they had borrowings in excess of 100% of their GDPs. The ongoing recession had made matters worse for these economies as government revenues had reduced.

The aforementioned comments assume importance in the Indian context, as India's public debt to GDP is estimated at 65%, the second highest among emerging markets, behind Hungary. They have also come right before the announcement of the budget. The fiscal deficit in 2011-12 is expected to exceed the budget estimate of 4.6 % of the GDP on account of subdued receipts and overshooting of the subsidy bill by at least Rs 1 lakh crore. To bridge the receipt-expenditure gap, the government plans to exceed its borrowing target for the current fiscal by Rs 92,000 crore, taking the government’s borrowings to a total Rs 5.1 lakh crore. Yields on the government bonds had recently shot up to close to 9% levels following the announcement of upward revision in market borrowing programme.

The RBI chief pointed out the need for conducting open market operations (OMOs), and said that OMOs are motivated by the objective of easing liquidity or reducing the yields on bonds for debt sustainability. In the presence of large sovereign borrowing that makes the Government's fiscal stance unsustainable, central banks typically have little choice. If the central banks do not conduct OMOs to bring systemic liquidity within reasonable limits, they risk losing control over financial stability. In India, however, the question is whether the OMOs are acting as a disincentive for fiscal discipline.

Since November, RBI has bought Rs 70,000 crore of government bonds via OMOs - a move that helped in cooling off the yields. This week, the central bank will be conducting an OMO to buy government bonds worth Rs 10,000 crore. This is despite a cut in cash reserve ratio by 50 basis points that released Rs 32,000 crore of liquidity in the system. Liquidity conditions continue to remain under pressure, as reflected in the repo borrowings by banks and the elevated overnight call money rates.

The S&P CNX Nifty is currently trading at 5,272.30, higher by 36.60 points or 0.70% after trading as high as 5,289.95 and as low as 5,225.75. There were 32 stocks advancing against 18 declines on the index.

The top gainers on the Nifty were Bharti Airtel up 7.15%, Ambuja Cement up 4.35%, DLF up 4.08%, HCL Tech up 3.75% and Sterlite up 3.51%.

IDFC down 5.36%, R Com down 4.18%, Cairn down 2.88%, Dr Reddy down 1.80% and SBI down 1.69% were the major losers on the index.

In the Asian space, Shanghai Composite jumped 1.80%, Hang Seng surged 1.56%, Jakarta Composite climbed by 0.61%, Nikkei 225 advanced 0.76%, Straits Times ascended 0.53%, Seoul Composite soared 1.28% and Taiwan Weighted garnered 1.37%.