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Money Sep 17, 2012

Sensex ends at 14 month high, is the euphoria short-lived?

By Firstbiz Staff

The Indian equity markets ended a volatile session in the green even as investors were slightly disappointed when the RBI for not reducing repo rates.

The Sensex closed 78 points higher at 18542.31 ( 0.42 percent) and the Nifty closed at 5610.00 , 32.35 points (0.58 percent) after the Reserve Bank cut Cash Reserve Ratio by 0.25 percent-the percentage of deposits banks keep with central bank keeping lending rates steady.

Investors were hoping that the central bank would follow up the government's unexpected spate of bold reform measures by reducing borrowing costs, which is why markets were unmoved by the 25 basis point cut in cash reserve ratio.

Reuters

The initial rally was largely helped by consistent inflow of foreign money that lifted the rupee to 54 against the US dollar, the Fed's stimulus announcement, favourable German's Constitutional court ruling, diesel price hike and FDIs approval in retail, aviation & broadcast carriage services sectors.

After a 200 point surge in the morning trade, the markets trimmed gains during the day after RBI left the lending rates unchanged. There is a fear that some roll back may happen. Reports indicate that the government may increase the number of subsidized LPG cylinders' supply to ten from earlier six in a year.

While some analysts were bullish about the market, many cautioned that the current rally is short-lived as fundamentals are still weak.

Deutsche Bank today said the benchmark sensitive index Sensex could touch the 20,000 mark by December end, driven by the recent reforms push and positive announcements from Europe and US. Even Morgan Stanley and Citigroup raised their targets for Sensex. While Citigroup raised its BSE target to 19,900 for June 2013, Morgan Stanley set a new target of 23,069 points by the end of December 2013.

However credit rating agency Moody's thinks the government's big bang reforms are minimal. "The measures seek to address specific market concerns about the government's fiscal position and the deceleration of the country's investment rate. However, the effect of the announced reforms on the government's credit profile is minimal because they are either too small to have material sovereign credit benefits or carry implementation or rollback risks that outweigh any credit positive benefits."

A JP Morgan report too highlights that cynics are skeptical over reforms. They argue that the increase in energy prices will increase the WPI by more than 100 bps, while despite the diesel price hike, suppressed inflation remains significant at more than 300 bps and the fiscal deficit could still come in closer to 6% of GDP.

Even Ved Prakash Chaturvedi,Chief Executive, L&T Finance Holdings said the euphoria is short-lived and calls for government policy initiatives to sustain the markets and economic growth.

Sanjeev Prasad of Kotak Institutional Equities feels that modest diesel price hike will not alter fiscal situation much and neither stake sale in PSUs will meet deficit target as it is not a reform. "Selling in 5-10% stake in companies periodically just to meet some budget targets do not classify as reforms," he told CNBC-TV18.

Shares in defensive sectors extended falls as investors bet the government's reform measures and Fed's new asset purchase programme will favour cyclicals and high beta stocks. Cigarette maker ITC fell 5.85 percent while Colgate Palmolive India fell 2.90 percent.

RIL, Wipro, ONGC, ICICI Bank, Tata Power, HDFC Bank, Bajaj Auto, L&T, Tata Motors, SBI, M&M, NTPC were among the major gainers in BSE Sensex and Nifty.

While, Infosys, TCS, Wipro, Coal India, ITC, Sun Pharma, HUL, Dr Reddys Lab are among the major losers in Sensex and Nifty.

Shares of property developers rallied on hopes the government's move to allow foreign direct investment in multi-brand retail chains will boost demand for commercial property. DLF was up 6.32 percent, while Phoenix Mills ended 9.53 percent higher.

Shares of retail, aviation and cable companies soared by up to 33 percent following the government decision to open these sectors to overseas investors. SpiceJet lead the pack with 11.88 percent gain. Trent was up 4.21 percent. Shoppers Stop was up 6.40 percent. Pantaloon Retailsurged 19 percent after the Cabinet passed the FDI in multi-brand retail.


by Firstbiz Staff

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