HUL, bank stocks lead decline as RBI hikes rates

The key benchmark indices dropped nearly 1% as investors fretted over the possibility of more interest rate hikes by the Reserve Bank of India (RBI) to tame inflation. The central bank raised its lending as well as borrowing rates by a quarter-point to cool inflationary pressures at a quarterly policy review today, 25 January 2011. Interest rate sensitive banking, auto and realty stocks declined. The BSE 30-share Sensex was down 181.83 points or 0.95%, off close to 380 points from the day's high and up close to 5 points from the day's low. Current growth and inflation trends warrant persistence with the anti-inflationary monetary stance, the RBI said.

The Sensex fell below the psychological 19,000 mark. The 50-unit S&P CNX Nifty fell below 5,700 level. FMCG major Hindustan Unilever (HUL) tumbled after disappointing Q3 results. Other FMCG stocks, too, declined. Index heavyweight Reliance Industries extended losses in late trade. The market breadth was negative in contrast with strong breadth earlier in the day. European stocks edged higher in volatile trade. Asian markets were mixed.
Intraday volatility was high as traders rolled positions in the derivatives segment from January 2011 series to February 2011 series ahead of the expiry of the near-month January 2011 contracts on Thursday, 27 January 2011. The market edged higher in early trade on firm Asian stocks. The market extended gains to hit fresh intraday high in morning trade. The market extended gains soon after the RBI announced a hike in key policy rates at about 11:30 IST. The market instantly came off highs only to bounce back immediately thereafter.
Volatility continued as the key benchmark indices hit fresh intraday lows in afternoon trade. The market recovered from lower level later. The market weakened in mid-afternoon trade. Volatility remained high as the market extended losses in late trade.
The stock market remains closed tomorrow, 26 January 2011, on account of Republic Day.
There are inflationary pressures in India and the government will have to begin supply-side management to tackle food inflation, Finance Minister Pranab Mukherjee said on Tuesday. He also said Tuesday's Reserve Bank of India rate hike is in line with the government's thinking and policy.
To control surging inflation, the Reserve Bank of India (RBI) at its quarterly policy review today, 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% with immediate effect. But, the central bank held the cash reserve ratio steady at 6%. Repo rate is the rate at which the RBI lends money to banks. Reverse repo is the rate at which RBI borrows funds from banks.
"As high food inflation persists, the prospect of it spilling over to the general inflation process is rapidly becoming a reality," Reserve Bank of India (RBI) Governor Duvvuri Subbarao said in the policy document. The RBI lifted its headline inflation projection for March 2011 to 7% from 5.5% previously. The central 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 RBI extended the period for offering additional liquidity support to commercial lenders by more than two months in view of the existing cash crunch in the banking system. Banks can now access the additional liquidity support, equal to 1% of banks' net demand and time deposits, until 8 April 2011, as compared to 28 January 2011, when the facility was due to expire. The frictional liquidity shortage is expected to ease as government balances adjust to the expenditure schedule. However, banks need to focus on the underlying structural cause of liquidity tightness arising out of the gap between the credit and deposit growth rates, the RBI said.
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.
It is important to emphasise that the role of monetary policy in the current inflationary situation is confined to containment and prevention of food and energy prices from spilling over into generalised inflation and anchoring inflation expectations, the central bank said. Unless meaningful output enhancing measures are taken, the risks of food inflation becoming entrenched loom large and threaten both the sustainability of the current growth momentum and the realisation of its benefits by a large number of households, the RBI said.
Another challenge to effective management of inflation by monetary policy arises from the persistence of a large fiscal deficit, the central bank said. While the government may succeed in raising receipts, both from high tax buoyancy and one-off sources, the real measure of fiscal consolidation lies in improving the quality of expenditure. If the government is able to commit more resources to capital expenditure, it will help deal with some of the bottlenecks that contribute to supply-side inflationary pressures. With reference to revenue expenditure, while large and diffused subsidies may contribute in the short term to keeping supply-side inflationary pressures in check, they may more than offset this benefit by adding to aggregate demand, the RBI policy statement 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.
Foreign institutional investors (FIIs) bought shares worth a net Rs 194.90 crore on Monday, 24 January 2011, higher than an inflow of Rs 37.60 on Friday, 21 January 2011. FII outflow in January 2011 totaled Rs 3251.70 crore (till 24 January 2011). FIIs had bought equities worth Rs 2049.60 crore in December 2010.
The results announced so far showed the combined net profit of 434 companies rose 22.2% to Rs 41052 crore on 20.6% rise in sales to Rs 340036 crore in Q3 December 2010 over Q3 December 2009.
European shares edged higher in volatile trade. The key benchmark indices in Germany and France rose 0.39% and 0.18%, respectively. UK's FTSE 100 fell 0.52% as Britain's economy suffered a shock 0.5% contraction in the last three months of 2010 after December's heavy snow took a far harsher toll, official data showed on Tuesday.
Asian stocks were mixed on Tuesday, 25 January 2011. The key benchmark indices in Indonesia, Japan and South Korea rose by between 0.22% to 2.63%. The key benchmark indices in China, Hong Kong Singapore and Taiwan fell by between 0.05% to 0.68%.
The Bank of Japan held its key overnight call rate range steady at zero to 0.1% by unanimous vote on Tuesday, 25 January 2011, as widely expected, and held its overall economic assessment unchanged. It also tweaked its economic growth forecast for the fiscal year ending in March to 3.3% from 2.1% predicted in October, but cut its gross domestic product forecast for the fiscal year beginning in April 2011 to 1.6% from 1.8%.
The US Federal Reserve is likely to leave policy unchanged and note a slight improvement in the economy's outlook at the end of a two-day meeting on interest rates on Tuesday, 25 January 2011-Wednesday, 26 January 2011.
US index futures reversed initial gains. Trading in US index futures indicated that the Dow could fall 15 points at the opening bell on Tuesday, 25 January 2011.
The US Commerce Department said on Monday it was easing restrictions of exports of high-technology goods to India in recognition of the two countries' stronger economic and national security ties.
A package of US tax cuts should give a lift to a global economic recovery that had already begun to gain speed late last year, the IMF said on Tuesday as it revised its world growth forecast higher. In an updated World Economic Outlook report, the International Monetary Fund said the global economy would likely expand 4.4% this year, a touch higher than the 4.2% it forecast in October. It said it expected growth of 4.5% in 2012.
The BSE 30-share Sensex was down 181.83 points or 0.95% to 18,969.45. The index gained 189.71 points at the day's high of 19,340.99 in mid-morning trade, soon after the RBI's policy announcement. The index declined 201.84 points at the day's low of 18,949.44 in late trade.
The S&P CNX Nifty was down 55.85 points or 0.97% at 5,687.40.
The BSE Mid-Cap index fell 0.41% and the BSE Small-Cap index declined 0.35%. Both these indices outperformed the Sensex.
Most sectoral indices on BSE declined. The banking sector index Bankex (down 2.34%), FMCG index (down 1.67%), Healthcare index (down 1.25%), Realty index (down 1.2%), and Auto index (down 1.05%), underperformed the Sensex. The BSE IT index (down 0.6%), Oil & Gas index (down 0.42%), Metal index (down 0.22%), PSU index (down 0.17%), Power index (up 0.28%), Capital Goods index (up 0.28%), and Consumer Durables index (up 1.73%), outperformed the Sensex.
The market breadth, indicating the health of the market, was negative compared with strong breadth earlier in the day. On BSE, 1687 shares declined while 1,212 shares advanced. A total of 110 shares remained unchanged.
Among the 30-member Sensex pack, 19 declined while the rest rose.
BSE clocked turnover of Rs 3610 crore, higher than Rs 2906.36 crore on Monday, 24 January 2011.
Index heavyweight Reliance Industries' (RIL) fell 1.29% to Rs 958.55, off the day's high of Rs 984.45. The stock had slipped 1.57% on Monday 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.
PSU OMCs gained on fall in crude oil prices after crude oil prices declined 1.4% on the New York Mercantile Exchange on Monday, 24 January 2011. It was the lowest settlement price since 16 December 2010. BPCL, HPCL and Indian Oil Corporation rose by between 2.09% to 4.92%. Lower crude oil prices will reduce under-recoveries of state-run oil firms on domestic sale of diesel, LPG and kerosene at controlled prices. The government has already freed pricing of petrol.
Oil exploration firms declined as fall in crude oil prices would result in lower realizations from crude sales for oil exploration firms. ONGC and Cairn India fell 0.56% and 1.48% respectively. Oil India rose 0.9%.
Sterlite Industries rose 0.28% in volatile trade after the company announced during market hours today said consolidated net profit rose 60.28% to Rs 1101.60 crore on 24.75% rise in total income to Rs 8810.05 crore in Q3 December 2010 over Q3 December 2009.
India's largest private sector steel maker by sales Tata Steel rose 0.96% after jumping 3.06% on Monday. The company's follow-on public offer (FPO) was subscribed 6.03 times last week.
Dr Reddy's Laboratories declined 3.15%. The company announced during market hours today that consolidated net profit, excluding extra-ordinary items rose 19% to Rs 270 crore on 10% growth in revenue at Rs 1900 crore in Q3 December 2010 over Q3 December 2009, as per International Financial Reporting Standards.
Interest rate sensitive banking stocks edged lower in volatile trade after the Reserve Bank of India raised the key short term rates by 25 basis points. India's largest private sector bank by net profit ICICI Bank fell 4.21% to Rs 1038.30, off the day's high of Rs 1090.70.
India's largest private sector bank by net profit HDFC Bank declined 2.85% to Rs 2087, off the day's high of Rs 2174.70.
India's largest bank by net profit and branch network State Bank of India was declined 0.51% to Rs 2679.25. The stock hit high of Rs 2737.60 and low of Rs 2675.20. Chairman O.P. Bhatt said the bank need not raise its rates after the Reserve Bank of India increased policy rates on Tuesday by 25 basis points.
India's largest FMCG firm by sales Hindustan Unilever tumbled 5.45% after net profit declined 1.8% to Rs 638 crore on 12% rise in net sales to Rs 5027 crore in Q3 December 2010 over Q3 December 2009. The stock was the top loser from the Sensex pack. The result was announced during trading hours today.
Hindustan Unilever (HUL)'s operating margins were lower by 320 basis points (bps) in Q3 December 2010 over Q3 December 2009 due to a steep rise in input cost, and brand investments. Commenting on the results Harish Manwani, chairman of HUL said that in an inflationary environment, the company will manage the business dynamically through judicious pricing actions and increased focus on cost effectiveness while ensuring that the company remains competitive in the market place.
Among other FMCG stocks, Dabur India, ITC, United Spirits, Nestle India and Marico fell by between 0.05% to 2.28%.
Interest rate sensitive realty stocks reversed initial gains after the Reserve Bank of India raised the key policy rates. DLF, Indiabulls Real Estate, Unitech and HDIL fell by between 0.67% to 3.11%.
Interest rate sensitive auto stocks reversed initial gains on worries hike in interest rates and higher vehicle prices could dent vehicle sales. Tata Motors, Mahindra & Mahindra, Maruti Suzuki India and Bajaj Auto fell by between 0.22% to 2.25%.
UltraTech Cement rose 0.22% after net profit rose 62.7% to Rs 318.96 crore on 124.53% rise in total income to Rs 3775.86 crore in Q3 December 2010 over Q3 December 2009. However, the result is not comparable due to amalgamation of Samruddhi Cement with the company with effect from 1 July 2010.
India's third largest IT exporter by sales Wipro rose 0.42% on bargain hunting. The stock had fallen sharply over the last two days following resignations of the joint-CEOs of its information technology business. The resignations were announced at the time of announcing third quarter results before market hours on Friday, 21 January 2011.
Wipro's net profit as per International Financial Reporting Standards rose 10% to Rs 1319 crore on 12% increase in total revenue to Rs 7829 crore in Q3 December 2010 over Q3 December 2009.
India's largest software services exporter TCS fell 1.17%. The stock hit a record high of Rs 1221 on Monday, 24 January 2011. On a consolidated basis, net profit rose 9.25% to Rs 2369.83 crore on 5.35% increase in total income to Rs 9857.56 crore in Q3 December 2010 over Q2 September 2010. The result was announced after trading hours on 17 January 2011.
India's second largest software services exporter Infosys declined 0.74%. Consolidated net profit rose 2.5% to Rs 1,780 crore on 2.3% rise in revenues to Rs 7106 crore in Q3 December 2010 over Q2 September 2010 as per International Financial Reporting Standards. The result was announced before market hours on 13 January 2011.
Larsen & Toubro (L&T) gained 0.42% after company said during market hours today that it signed a joint venture with Kobe Steel for tyre and rubber industry equipment.
Meanwhile, as per reports L&T would reorganise its operations into nine business verticals as the conglomerate seeks to simplify its structure to better manage growth. Each of the nine independent companies, which has been put in place with the help of international consulting outfits Bain and McKinsey, will have an eight-member board, including three representatives from the business and three external directors.
These nine independent companies are in the business of power equipment, hydrocarbon, machinery & industrial products, building & factories, heavy engineering, metals & minerals, electrical & automation products, electrical and transmission, mechanical and materials, and infrastructure.
India's largest power equipment maker by sales Bhel rose 0.74%, extending last two days' gains triggered by good Q3 results. Net profit rose 30.82% to Rs 1403.23 crore on 24.63% rise in net sales to Rs 8849.27 crore in Q3 December 2010 over Q3 December 2009. The result was announced during trading hours on Friday, 21 January 2011.
Sanraa Media clocked highest volume of 1.41 crore shares on BSE. C Mahendra Exports (1.28 crore shares), Comfort Intech (1.17 crore shares), Ispat Industries (57.64 lakh shares) and Resurgence Mines (46.36 lakh shares) were the other volume toppers in that order.
State Bank of India clocked highest turnover of Rs 327.08 crore on BSE. C Mahendra Exports (Rs 171.37 crore), TTK Prestige (Rs 140.07 crore), ICICI Bank (Rs 136.42 crore) and Tata Steel (Rs 131.74 crore) were the other turnover toppers in that order.