Markets to start on a flat-to-cautious note ahead of RBI policy announcement

The Indian markets traded in tandem with Asian peers on a pessimistic note in the first part of trade in last session but they managed to prune their losses to a large extent in the second half and settled with only moderate cuts by the end after getting some support from the unexpectedly encouraging weekly inflation numbers which declined sharply to nearly a four-year low and also from the optimism in European markets. Today the start for the markets is likely to be on a flat-to-cautious note as investors at large are awaiting mid-quarter monetary policy review by the RBI. There will be cautiousness in the markets ahead of RBI’s policy announcement in which the central bank is expected to tilt towards growth rather than continue to be hawkish. But persistent high inflation has dashed hopes of a policy rate cut or liquidity easing measures. The rate sensitive counters like Banking, Automobile and Realty will keep buzzing in the session. The PSU oil marketing companies are likely to extend their positive momentum following the plunge in the international crude prices overnight. Meanwhile, finance minister Pranab Mukherjee admitted domestically the struggle against inflation and tightening of interest rate regime has contributed to lowering of growth and investment. However, he advocated the need for “innovative remedies” to simultaneously tackle the double whammy of industrial slowdown and high inflation.

The US markets halted the three-session downtrend on Thursday after investors overlooked the gloomy European developments as the encouraging US economic reports came into limelight, pushing stocks slightly higher. Sentiments got a lift after a cheering US jobs data showed that jobless claims dropped sharply while an index measuring regional manufacturing jumped to the highest level since May. The better than expected US economic reports boosted sentiment across the Asian region where markets largely displayed optimistic trends. However, gains for most indices in the region were less pronounced as ratings agency Moody's expressed fresh concerns over the Euro-zone debt crisis and reiterated that it would review the ratings of all 27 EU nations in the first quarter of next year.

Back home, Indian equity bourses failed to negotiate a close in the positive territory in Thursday’s session as investors chose to trim down positions from blue-chip stocks ahead of the all-important RBI mid-quarter review of the monetary policy on Friday. Market participants overlooked the sixth consecutive weekly fall in the inflation rate as they stayed put awaiting the RBI’s Monetary policy stance which will decide the further direction for markets. The psychological 15,850 (Sensex) and 4,750 (Nifty) levels proved as stern resistances for the frontline gauges as they failed to breach those levels in the session after bouncing from intraday lows. The key gauges recovered a great deal in second half of trade as sentiments got some support from the positive European markets. Meanwhile, India’s food inflation declined sharply to a nearly four-year low of 4.35% during the week ended December 3, thanks to the slew of seasonal factors like new crop arrival in the market, and statistical base effect. The chief economic adviser to finance ministry, Kaushik Basu even went ahead to predict that the food inflation would recede to sub 3% level within a month. However, sentiments remained fragile as the rupee extended its streak of depreciation and plummeted to yet another record low of 54.30 per dollar, taking losses this week to about 4%, on worries that slowing domestic economic growth will dissuade further capital inflows. Earlier on Dalal Street, the benchmark got off to a daunting opening tracking the pessimistic sentiments prevailing across Asian markets amid the endless stream of discouraging developments from the European region. The frontline indices failed to recover after the gloomy opening and drifted to lowest point of the day in late morning trades ahead of the weekly inflation data announcement. However, sentiments improved after the surprisingly encouraging inflation figures were released, which helped the key gauges to pare losses and climb to higher levels. The optimism in European markets too gave support to the local bourse which eventually snapped the session on a negative note but with moderate losses. On the BSE sectoral space, the Capital Goods  pocket bore the maximum brunt of selling pressure and plunged by around two percent followed by the Consumer Durables index which sank by over one and half a percent. On the flipside, the defensive FMCG pocket remained the top gainer in the space with over half a percent gains followed by the Power and Oil & Gas counters which too settled with similar amount of gains. Finally, the BSE Sensex lost 44.67 points or 0.28% to settle at 15,836.47, while the S&P CNX Nifty declined by 16.90 points or 0.35% to close 4,746.35.

The US markets ended modestly higher on Thursday, halting a three-day slide, after reports on jobless claims and manufacturing pointed to strength in the US economy. Initial jobless claims filed in the US last week were the lowest since May 2008, the Labor Department stated, the latest indication of strength in the weak jobs market. Also helping sentiments was a gauge of mid-Atlantic manufacturing activity which jumped for December versus the prior month. A slew of other US economic data also cheered investors. US wholesale prices rose slightly in November due to higher food costs, but the underlying rate of increase in producer prices remained tame, indicating little inflation pressure, while the US current account deficit narrowed in the third quarter.

However, US industrial production fell for the first time in seven months during November, an unexpected drop caused by declining output of cars, electronics, clothing, and other products. Besides, Bank of America Corp., Goldman Sachs Group Inc. and Citigroup Inc. had their credit grades cut by Fitch Ratings. The lenders’ long-term issuer default ratings were cut one level to A from A+, Fitch stated.

In Europe, manufacturing activity in the euro zone contracted at a slower pace than expected in December, while Germany’s preliminary December figures rose versus the previous month. A successful Spanish bond auction also lifted investor spirits.

The Dow Jones industrial average gained 45.33 points, or 0.38 percent, to 11,868.80. The Standard and Poor’s 500 closed higher by 3.93 points, or 0.32 percent, to 1,215.75, while the Nasdaq composite gained 1.70 points, or 0.07 percent, to 2,541.01.

Crude oil prices extended their declining streak on Thursday as they plunged over a percent amid growing concerns over the prospects of global oil demand. Oil prices fell as the stronger dollar made dollar denominated commodities expensive for overseas investors while lingering nervousness over Euro-zone’s onerous debt debacle coupled with fears over slowing Chinese economy offset encouraging US employment and manufacturing activity data.

Benchmark crude for January delivery plunged $1.08, or 1.1% to settle at $93.87 a barrel, after trading as high as $95.99 and as low as $93.31 on the New York Mercantile Exchange. In London ICE January Brent crude, which expired on Thursday, settled with marginal gains of $0.7 a barrel at $105.09 a barrel.