S&P’s rating cut threat peters down rally at Dalal Street; Sensex retreats 0.30%

Stock markets in India failed to keep the gaining momentum going for the sixth straight session on the week’s first trading session as the relief rally finally petered out a day ahead the release of India’s industrial production numbers for April.

The psychological 5,100 (Nifty) and 16,800 (Sensex) levels proved as stern resistance levels as the benchmarks witnessed a sharp trend reversal in late hours and plunged to close around the day’s lowest levels. The Indian bourses not only halted the five session gaining streak but also resumed their streak of underperformance against their global peers as they were outclassed by all the Asian as well as the European counterparts.

Sentiments got spooked in the dying moments after reports showed global rating agency S&P’s threatened India that it could lose its lowest investment grade rating of BBB- and become the first 'fallen angel' among the BRIC nations. Investors started to book profits largely across the board after reports highlighted that the combination of a weakening political context for further reform, along with economic deceleration, raised the risk that the government may take modest steps backward away from economic liberalization in the event of unexpected economic shocks.

On the domestic front, the cues from money markets started to look worrisome as the rupee, which appreciated sharply in morning trades, had pared almost all the gains and weakened by around half a percent against the US dollar. Moreover, investors also turned cautious as they shifted their focus towards Tuesday’s IIP data for April month, which is widely expected to expand by around 1.7% y-o-y.

Meanwhile, power producing majors like Tata Power, Adani Power and Reliance Infra rallied sharply in the session amid reports that power projects using imported coal could be allowed to hike tariffs by up to Re 1 per unit to counter the effect of increase in fuel price due to additional taxes or changes in law by the governments of source nations.

On the BSE sectoral front, investors were seen squaring off hefty positions from the Capital Goods counter, which got battered by over one and half a percent, being the top laggard in the space a day ahead of April IIP data announcement. The defensive - Healthcare and high beta - Realty pockets too got pummeled in the session by over a percent cuts. Amid largely across the board selling, the Consumer Durables index remained the only counter with prominent gains of around a percent.

On the global front, sentiments got bolstered by encouraging over the weekend cues from both sides of Atlantic. On one hand, the US markets surged as apart from the encouraging US trade data, US President Barack Obama’s statement that European leaders need to act to resolve the region's financial crisis, supported market sentiments.

On the other hand, investors also cheered European Union’s decision to provide a loan of up to 100 billion euros ($125 billion) for distressed Spanish banks. Markets across the Asian markets rallied fervently while the European markets too got off to a solid start and major equity indices in the region traded with significant gains of close to two percent.

Back home, the NSE’s 50-share broadly followed index Nifty, shed around a quarter percent to settle just above the psychological 5,050 support level while Bombay Stock Exchange’s Sensitive Index - Sensex fell over fifty points to finish above the crucial 16,650 mark. Moreover, the broader markets settled on a flat note but the Small Cap index went on to outperform all its larger peers and closed with marginal gains of less a quarter percent.

The markets fell on larger volumes of over Rs 1.50 lakh crore while the turnover for NSE F&O segment also remained on the higher side as compared to that on Friday, at over Rs 1.12 lakh crore. The market breadth remained optimistic as there were 1,447 shares on the gaining side against 1,260 shares on the losing side while 144 shares remained unchanged.

Finally, the BSE Sensex lost 50.86 points or 0.30% to settle at 16,668.01, while the S&P CNX Nifty declined by 14.25 points or 0.28% to close at 5,054.10.

The BSE Sensex touched a high and a low of 16,893.81 and 16,627.48 respectively. The BSE Mid cap index was down by 0.20% and Small cap index up by 0.21%.

Tata Power up 2.18%, Bajaj Auto up 1.85%, Hindustan Unilever up 1.58%, Gail India up 1.55% and Coal India up 1.44% were the major gainers on the Sensex, while Cipla down 2.25%, BHEL down 2.21%, L&T down 1.99%, Jindal Steel down 1.93% and Tata Motors down 1.40% were the losers on the index.

The top losers on the BSE sectoral space were, Capital Goods down 1.64%, Healthcare down 1.34%, Realty down 1.02%, Oil & Gas down 0.75% and Auto down 0.56%, while Consumer Durables up 0.99% and FMCG up 0.19% were the only gainers on the BSE sectoral space. 

Meanwhile, taking stock of the economic situation in Asia’s third largest Indian economy which is showing signs of cooling and the nation’s government being in a state of policy paralysis, global credit rating agency Standard & Poor's (S&Ps) has warned India that it could lose its lowest investment grade rating of BBB-. In the event of such a downgrade, India would become first country to sport a sovereign credit rating of speculative grade from the four nations BRIC grouping, comprising Brazil, Russia and China among others.

S&P’s in its report ‘Will India Be The First BRIC Fallen Angel?’ has explained that government’s efforts to revive the flagging Indian economy and its greater vulnerability to withstand the economic turbulences would play a pivotal role in determining whether the country can maintain an investment-grade rating or become the first 'fallen angel' among the BRIC nations. Brazil and Russia have a credit rating of BBB which is one notch above India’s while China’s rating is several notches higher at AA-.

The report, which analyzes the nation’s GDP growth forecasts and the potential effects on business confidence along with the government's pledge to push economic reform, highlights that in the event of unpleasantly surprising economic shocks, the government would have to take potential backward steps that could reverse India's liberalization of the external sector and the financial sector. Setbacks or reversals in India's path towards a more liberal economy are likely to be long term challenges which could dampen the nation’s growth outlook and credit quality.

In April 2012, Standard & Poor's had reviewed India’s sovereign debt rating and had slashed the rating outlook to negative from stable citing weak GDP expansion prospects and the risk that its external liquidity and fiscal flexibility may wear down. The rating agency’s recent report also argues that despite the challenges, the economy remains relatively resilient to weather this period of heightened global uncertainty than it was in the early 1990s, when it suffered a balance-of-payments crisis.

The S&P CNX Nifty touched a high and low 5,124.45 and 5,040.70 respectively.

The top gainers on the Nifty were Tata Power up 2.23%, Bajaj Auto up 2.07%, Grasim up 1.55%, HUL up 1.40% and Siemens up 1.32%. On the flipside, HCL Tech down 3.46%, BHEL down 2.83%, Cipla down 2.62%, Sesa Goa down 2.52% and L&T down 2.40% were the top losers on the index.

The European markets were trading on a positive note, as France's CAC 40 up 1.55%, Germany's DAX up 1.80% and United Kingdom’s FTSE 100 up 0.94%.

Asian markets resumed their northward journey after a day of halt as investors’ fears about struggling Spain eased after Euro zone finance ministers agreed to lend up to $125 billion to shore up Spain’s troubled banks, with Madrid set to report its exact required amount after an independent audit is completed in just over a week. Moreover, better than expected Chinese economic data too supported the sentiments.

Meanwhile, South Korean shares climbed 1.7 percent to close at their highest level in more than four weeks on Monday after euro zone finance ministers agreed on a bailout package to recapitalize debt-stricken Spanish banks. While, Hong Kong and Chinese shares rebounded, up by 2.44% and 1.70% respectively amid a broad rally across Asia as a bailout for Spanish banks and China economic data that was not as bad as feared prompted offshore investors to cover short positions.