Sensex surges 500 points on BOJ easing

The BSE Sensex and Nifty surged nearly 2 percent on Friday to record highs for the second consecutive day after Bank of Japan's surprise expansion of its massive stimulus programme raised hopes for additional foreign inflows, boosting blue-chips.

In a rare split decision, the BoJ's board voted 5-4 to accelerate purchases of Japanese government bonds so that its holdings increase at an annual pace of 80 trillion yen ($725 billion), up by 30 trillion yen.

BoJ's easing is being seen as an alternative to the U.S. Federal Reserve's just concluded bond-buying programme, supporting the rally in emerging markets such as India, already underpinned by reforms and hopes of a rate cut.

"BOJ's easing would further the argument of central bankers other then Fed providing stimulus to support economies and assets," said U.R. Bhat, managing director at Dalton Capital, a unit of U.K.-based investment management firm Dalton Strategic Partnership LLP that manages nearly $2 billion in assets.

"I agree there are strong expectations of a rate cut. But there is no tax on expectations. Is it?"

Foreign portfolio investors have bought shares worth $13.45 billion and $22.44 billion in debt in Asia's third-largest economy so far this year.

India ended fuel price controls, raised gas prices, proposed opening up of the coal sector and relaxed rules for foreign investment in construction, earlier in October.

The Sensex rose as much as 2 percent to an all-time high of 27,894.32, before ending up 1.9 percent at 27,865.83.

The Nifty gained as much as 1.98 percent to mark a record high of 8,330.75, and finished 1.87 percent higher at 8,322.20. Both indexes surpassed their previous record highs hit on Thursday.

October also marked an eighth month of gains in nine for the indexes, mainly helped by optimism tied to the election of Narendra Modi as Prime Minister and thereafter by a 24 percent slump in crude oil price since June.

The Nifty rose 4.5 percent, while the Sensex advanced 3.64 percent in October.

Shares also marked their biggest weekly gains since June. The BSE rose 3.8 percent, while NSE gained 3.84 percent.

Market puts up a resilient show

The indices have once again bounced higher from key supports, indicating strength

India equity markets celebrated Diwali in style, with the Nifty regaining the 8,000 mark and the Sensex moving above 26,800. Equity investors, across the globe, shook off their fears and resumed buying last week; perhaps enticed by the sharp corrections in some stocks.

There was plenty of positive news flow last week. The Modi Government announced a series of policy reforms including diesel deregulation, gas price hike and e-auction of the cancelled coal blocks. The victory of the BJP in the Assembly elections too buoyed sentiments.

Global markets were upbeat as well, with the US and European markets reversing smartly. However, the reason for the reversal isn’t too convincing. It was apparently comments by St. Louis Federal Reserve Bank President, James Bullard — that policy-makers should consider delaying the end of quantitative easing — which caused the turnaround in stock prices.

With the expiry of the October derivative contracts scheduled on Thursday, short-covering by traders could lend further support to the indices.

Volumes on NSE’s derivative segment has spiked towards the weekend and open interest in NSE’s derivative segment has moved above ₹220,000 crore, indicating heightened trading activity. Investors will keep watch on the earnings announcements of companies as well as the movement in crude prices.

The midweek FOMC meeting will be the key to determine the trend in global equity markets. With the bond repurchase programme coming to an end this month, market will keenly await Fed’s next move, especially the impending rise in interest rate.

Foreign portfolio investors reversed their negative stance towards Indian equities last week. After being net sellers since the beginning of the month, these investors turned net buyers.

Momentum indicators in the daily chart of the Sensex are rising to the neutral zone from bearish territory.

This implies that the rally needs to move a little further to signal a reversal in the short-term trend.

That both the Sensex and the Nifty have moved firmly above their 50-day moving average is however a positive sign.

Sensex (26,851)

The Sensex opened with an upward gap last Monday and went on to build on these gains over the week.

The week ahead: The short-term trend in the Sensex has reversed higher. But the index has not made a clean break above the key resistance at 26,820. If the index manages to close above this level on Monday, it will mean that the index can head towards 27,255 or 27,354 in the days ahead.

But the inability to hold above 26,800 on Monday will mean that the index can decline to 26,576 (50-day moving average) or 26,319. Next short-term support is 25,911.

Medium-term trend: The Sensex managed to hold above the 26,000 level last week. The medium-term view is therefore not under any threat. It needs to be seen if the Sensex manages to break above the 27,350 level this time. The inability to do so can keep the index in a range between 26,000 and 27,350 for few more weeks.

We retain the key medium-term supports at 25,000 and 24,500.

Nifty (8,014.5)

The Nifty managed to move above its 50-day moving average and close above the 8,000 mark last week.

The week ahead: The Nifty recovered early last week and has moved to our second target at 8,016. This is a key short-term resistance. The guide-posts for next week’s trade are:

If the Nifty manages to close above 8,000 on Monday, it will mean that the index will attempt to move to 8,160 or 8,180.

Target above 8,180 is 8,360.

The inability to close above 8,000 on Monday will drag the index to 7,915 or 7,848. Traders should desist from initiating long positions on a move below 7,848.

Target below 7,848 is 7,729.

Medium term trend: The medium-term trend for the Nifty stays positive. But the index is nearing a key medium-term resistance. The inability to move beyond 8,150 will make the index move between 7,300 and 8,200 for few months. Medium-term view will be threatened only on a close below 7,300.

Global cues

Global indices advanced from lower levels, beginning a short-term reversal. But this revival needs to sustain another week before we can take it seriously.

Most global indices recorded sharp declines in the middle of the week. But subsequent recovery was sharp.

This leads to the hope that at least one leg of the correction could have been completed last week. Investor sentiment revived sharply and the CBOE VIX declined from the intra-week high of 22.1 to 15.5, reflecting this improvement.

The Dow recovered from the intra-week low of 16,260 to close 450 points higher. But the index is currently poised at its key short-term resistance at 16,812. The index needs to move beyond this level to pave the way for a rise to 17,350.

On the other hand, the inability to move beyond this level will drag the index lower to 15,855 or 15,340.

The dollar index is trying to hold in the band between 85 and 87. Key support that needs to be watched now is at 84. The index needs to decline below this level to signal the end of the rally that began in May.

Reuters Poll - India's growth pace to pick up as reforms draw investment

India's economy will likely grow at its fastest pace in two years in the current fiscal year as Prime Minister Narendra Modi implements reforms to attract investment, a Reuters poll of economists showed on Friday.

The after-glow from Modi's election victory earlier in the year helped India's economy clock a robust 5.7 percent growth rate for the quarter ending in June.

The economy has just lumbered through the longest spell of below-5 percent growth in a quarter of a century, but forecasts are now predicting that the slump has passed.

Hopes of reforms for economic revival from Modi have attracted foreign capital inflows - before the election in May until now - triggering a massive rally in the stock market, making it one of the best performers in Asia so far this year.

That optimism looks set to continue.

"The outlook is improving and that mostly reflects the fact that the new government has pledged to prioritise economic reforms. First we saw an improvement in sentiment and now it is translating to actual pick-up in activity," said Tuuli McCully, senior economist at Scotiabank.

"Obviously, we really need to see more (reforms). But as of now, I am encouraged by how things are moving."

Over the past month, Modi's government has stepped up economic reforms, opening up the coal industry to private investors and freeing diesel prices to market forces from government subsidies.

The latest Reuters poll of 20 economists taken over the past week shows Asia's third-largest economy will likely grow 5.5 percent this fiscal year and 6.4 percent the next, slightly better than 5.3 percent and 6.3 percent expected in the July poll.

"India is transitioning away from stagflation conditions, and the much-needed combination of higher real rates, a more friendly investment environment and structural reforms appear to be slowly coming together," wrote Manoj Pradhan, an economist at Morgan Stanley.

However, without big-bang reforms to propel the economy back to a near double-digit growth, economists say, a broader and sustained economic revival will likely remain elusive.

Also, the global economy is showing signs of weakening and is expected to weigh on overseas demand for Indian merchandise.

Indeed, the economic outlook for two of India's biggest trading partners - China and the euro zone - has dimmed and is expected to drag on the global economy.

Consumer price inflation - the biggest challenge faced by the Reserve Bank of India - cooled to 6.46 percent last month, the lowest level since this series began in January 2012, from a revised 7.73 percent in August.

But the poll showed consumer prices will average 7.5 percent this fiscal year and ease to 7.0 percent next year.

"Despite lower inflation prints and the fall in commodity prices, the communication from RBI suggests it will keep monetary policy restrictive in the near term to achieve medium-term price stability," wrote Rahul Bajoria, economist at Barclays.

The RBI is expected to keep its key repo rate steady at 8.0 percent well into next year, even as a separate Reuters poll in September showed the Sensex would keep setting record highs through to the end of 2015.

Modi govt’s big reform push: Diesel deregulated, natural gas price hiked

Prime Minister Narendra Modi unveiled its biggest reform so far on Saturday, aligning diesel prices with international crude oil costs, a move that will make the key fuel cheaper by Rs. 3.37 a litre and help control inflation. Government also hiked natural gas tariff by 46 percent that will push up fertiliser, power, CNG and PNG rates.

This will be the first reduction in diesel rates in over five years. Diesel price were last cut on January 29, 2009 when they were reduced by Rs 2 a litre to Rs 30.86. Rates had since climbed to Rs 58.97. It will cost Rs 55.6 per litre in Delhi.

The move also eases the government’s huge subsidy burden paid out of the budget. In the first quarter of this fiscal (April-June 2014), the under-recovery burden on oil marketing companies was Rs 9,037 crore which would have required a sharing mechanism between the budget, consumers, OMCs and upstream oil and gas companies.

Against the backdrop of the steep doubling of rates to USD 8.4 recommended by Ranagarajan Committee and cleared by the previous UPA government, the government today approved a 46 per cent increase in natural gas prices that will go up from current USD 4.2 per million British thermal unit to USD 6.17 per mmBtu from Nov 1.

The gas price hike, according to a modified formula approved by the Cabinet, comes to USD 5.61 per mmBtu on gross-calorific value basis and USD 6.17 as per net calorific value – the principle used for calculating current USD 4.2 rate.

RIL will however not get the new gas price for its currently producing Dhirubhai-1 and 3 gas fields in eastern offshore KG-D6 till it makes up for the shortfall in production in the past four years.D1&D3 is producing under 8 million standard cubic meters per day against a committed 80 mmscmd. Consumers of RIL gas will have to pay higher rates but RIL will get only USD 4.2, with the difference being credited to a gas pool account maintained by GAIL.

RIL will get the higher price if it is able to prove legally that output fall was not deliberate and was due to geological reasons as it claims.

Higher gas prices would increase the expense of running power stations and fertilizer plants, raising infrastructure and food costs and accelerating the rate of inflation.

Every dollar increase in gas price will lead to a Rs 1,370 per tonne rise in urea production cost and a 45 paise per unit increase in electricity tariff (for just the 7 per cent of the nation’s power generation capacity based on gas).

Also, there would be a minimum Rs 2.81 per kg increase in CNG price and a Rs 1.89 per standard cubic metre hike in piped cooking gas.

Gas price increase had been deferred on three occasions previously.

The previous UPA government had in June last year approved a price formula suggested by a panel headed by C Rangarajan and re-confirmed it in December 2013 with certain conditions for Reliance Industries’ eastern offshore KG-D6 block.The formula was to be implemented from April 1, 2014, when the tenure of USD 4.205 per million British thermal unit price fixed for KG-D6 gas was to expire, but before a rate could be notified, general elections were announced and Election Commission asked the then government to defer it till completion of polls.

On June 25, the new BJP-led government deferred it for a further three months to September-end saying the issue required “comprehensive consultations.”

The revision was again deferred by 45 days on September 24 as the government seemed wary of taking an unpopular decision on just before assembly election in crucial states of Maharashtra and Haryana.

The formula, which was notified on January 10, will more than double the current USD 4.2 per million British thermal units. The new gas price was to be applicable to both state-owned ONGC produced fuel as well as private sector RIL’s gas.

The delay in gas prices had most affected Reliance Industries and state-owned Oil and Natural Gas Corp (ONGC). RIL and its partners BP plc of UK and Canada’s Niko Resources on July 6 slapped an arbitration notice on the government seeking implementation of a gas price revision which was due to them on April 1.

For ONGC, the nation’s largest gas producer, the postponement of price increase was seen as a dampener to its stock valuation particularly when the government had plans to sell a 5 percent stake in the company to help narrow budget deficit.

India’s offshore oil and gas industry is “at risk” in the absence of higher gas prices, BP CEO Robert Dudley had said on June 17.

RIL has been selling gas from KG-D6 at the same price since it started production in April 2009. The government increased ONGC and Oil India Ltd’s selling price to match RIL’s in May 2010.

IOC to cut petrol prices by 1.2 rupees from Wednesday

Indian Oil Corp will cut retail gasoline prices by about 1.78 percent or 1.21 rupees a litre from Wednesday as global prices of the fuel have eased since the last revision, the company said in a statement late on Tuesday.

The three state-run fuel retailers -- IOC, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd -- tend to move their prices together.

($1 = 61.42 Indian Rupees)

India's trade deficit widens to $14.25 billion in September

 India's trade deficit widened to $14.25 billion in September following a jump in oil and gold imports, government data showed on Tuesday.

The deficit stood at $10.84 billion in August.

Merchandise imports surged nearly 26 percent last month year-on-year to $43.2 billion. Exports, meanwhile, grew a tepid 2.73 percent on year to $28.9 billion.

Gold imports in the month under review increased manifold to $ 3.75 billion compared to $682.5 million in same month last year.

Indian Markets Outlook for the week – 13.10.2014 to 17.10.2014

Benchmark share indices are expected to move within a narrow range next week as investor’s eye key economic data and companies' earnings reports for Jul-Sep. Data on Consumer Price Index inflation for September will be released on Monday. We see it at 7.2% against 6.75% a month ago.

IndusInd Bank and Reliance Industries will detail their financial results for Jul-Sep on Monday.

We expect IndusInd Bank to post a net profit of 4.17 bln rupees, up 26.23% on-year and see net sales at 8.27 bln rupees, up 3.3% on-year. Reliance Industries' net profit is seen at 53.75 bln rupees, unchanged from a year ago and net sales at 944.74 bln rupees, down 8.95% from a year ago.

Other Nifty companies which will detail their earnings next week are Bajaj Auto, HeroMotoCorp, Tata Consultancy Services, Axis Bank, HCL Technologies and Zee Entertainment Enterprises.

Investors will also keep a close eye on global developments. Any further fall in prices of crude oil may fuel a fall in shares of upstream oil companies. Cairn India is expected to be hit the most if crude prices continue to slip. The sentiment in the US, Asian and European markets will have a bearing on Indian equities as concerns surrounding the health of the global economy continue

to persist.

Bank shares are expected to recover if data on industrial output and inflation turn out to be positive. Shares of information technology and pharmaceutical companies are expected to rise as well. Shares of fast moving consumer goods companies may continue to fall next week.