The markets have begun the new year on a depressing note. After an unabated three-week rally saw the indices signing off the year 2010 on a high, the rising fears of an interest rate hike by the central bank at a policy review scheduled later this month came back to spook the Street. The BSE Sensex tumbled 817 points or 3.9% to 19,691 and the Nifty tanked 229 points or 3.7% at 5,904 to register their biggest decline in two months, with all the sectoral indices ending in the red. The rate-sensitives did a bulk of the damage; the auto index shed 7.3% to end the week at 9486 and banking index lost 6.4% at 12512. The broader markets were worse off, with the mid-cap index skidding 4.2% and the small-cap index shedding 3.1%.
There are concerns that, having raised the key interest rates for six times in 2010, the RBI may opt for another hike in its next policy review on January 25 to cool down inflation. The markets have already factored in a 25 basis point hike in the interest rates, but there are fears that the central bank may front-end its rate increases and hike the rates by 50 basis points. But the market downside may be capped as the upcoming result season, beginning with the announcement of the Infosys numbers on January 13, may attract buying interest.
The key benchmark indices had eked out small gains to scale fresh seven-week closing highs on the first trading session of calendar year 2011. The sentiment turned shaky immediately thereafter, leading to a soft decline on three out of five remaining trading sessions and culminating in the 2%+ drubbing on disastrous Friday that dragged the Sensex and Nifty below their psychological levels of 20k and 6000 respectively and their highest one-day fall in seven months.
Food inflation soared to a year's high of 18.32% in the year to 25 December 2010 due to a spurt in the prices of vegetables, onions and milk. A huge increase of over 82% in onion prices and 58.85% in vegetables led to the increase in food inflation. The other items that contributed to price rise were egg, meat and fish (up 20.83 per cent), fruits (19.99 per cent) and milk (19.59 per cent).
The government was forced into fire-fighting mode. The finance minister Pranab Mukherjee asked the state governments to remove supply chain bottlenecks in the food sector to bring prices down quickly. The government deferred a decision to free the prices of urea and bringing it under the Nutrient Based Subsidy (NBS) policy regime even as a panel of secretaries has been asked to work out a viable model for decontrolling the prices. And Union petroleum and natural gas minister Murli Deora said that his ministry was not in favour of raising diesel and cooking gas prices despite a spurt in global prices of crude oil. And deputy chairman of Planning Commission Montek Singh Ahluwalia expressed the hope that the prices would cool by February.
Chief Economic Advisor in the Finance Ministry, Kaushik Basu said the rise in food inflation was expected, but not to the extent of 18.32 per cent. The International Monetary Fund (IMF) said that India might need to increase the policy rates to contain inflation. It also predicted India's gross domestic product (GDP) growth to moderate to 8% next year (2011-12). And Yes Bank chief economist Shubhada Rao too felt that the monetary policy would continue to remain tight on inflationary concerns.
Meanwhile, after growing at a robust pace for most of the ongoing financial year, the activity in the manufacturing activity slowed in December due to decline in the rate of incoming new orders. The HSBC Purchasing Manager's Index, a headline index designed to measure the overall health of the manufacturing sector, stood at 56.7 in December compared to 58.4 in November.
Exports in November 2010 rose by an annual 26.5% to $18.9 billion, while imports for the month grew 11.2% on the year to $27.8 billion, government data released early this week showed. India's trade deficit in November narrowed to $8.9 billion compared with $9.7 billion in October.
The major losers on the BSE were ACC (weakened by 8% at Rs 999), Bharti Airtel (shed 8% at Rs 338) and BHEL (lost 7% at Rs 2290). Cipla, DLF and HDFC were the other major losers. And RIL has lost 2% at Rs 1064.
Auto stocks slumped on worries higher interest rates and higher vehicle prices could dent demand for vehicles. Among the auto heavyweights, Bajaj Auto lost 5.6% at Rs 1317, Hero Honda slid by 4.6% at Rs 1873, M&M shed 3.9% at Rs 738, Maruti lost 3.5% at Rs 1343 and Tata Motors lost 2.1% at Rs 1189. In the auto ancilliaries space, Amtek Auto weakened by 14% at Rs 126, Apollo Tyres lost 8% at Rs 64 and Bharat Forge lost 5.4% at Rs 363.
Banking stocks declined on concern higher deposits rates may impact banks' net interest margins, thereby hurting profitability. Axis Bank weakened by 13% at Rs 1280, HDFC Bank lost 7.5% at Rs 2268, ICICI Bank lost 7.4% at Rs 1048 and SBI lost 3.9% at Rs 2599.
Ackruti City lost 10% at Rs 241 to emerge as the top loser in the realty space. DLF shed 7% at Rs 268, HDIL lost 6% at Rs 183 and Indiabulls Real Estate lost 5% at Rs 125.
The metal space saw Hindalco weakening by 12% at Rs 1343, Hindalco losing 5% at Rs 233 and Jindal Steel losing 3% at Rs 705.
In the midcap space, 3M India tanked 22% at Rs 3613, Aban Offshore plunged by 15% at Rs 766 and Ackruti City crashed 13% at Rs 241. And the smallcap space saw the likes of 3i Infotech, AK Capital and Aarti Industries weakening by 22% each at Rs 58, Rs 691 and Rs 59 respectively.
