Markets Crack Further, RBI Maintains Hawkish Stance

The Indian markets have once again cracked over political and macroeconomic worries. During the week, some crucial political events unfolded.

One major incident was the DMK’s pulling out the support of its 18 MPs to the Congress-led UPA government, thanks to the UPA’s weak response to the issue of human rights violation against the Tamil community in Sri Lanka. The Central government is not in an immediate danger losing power and hence there is less probability of early polls. The political stability is however considerably shaken implying that the government now cannot afford to hurt any of its close allies.

The week also witnessed RBI cutting the repo rate by 25 bps while maintaining its hawkish stance on inflation and economy. While the rate cut was in line with market expectations, the RBI has cleared that there is less room for a further rate cut going ahead. This has impacted the rate sensitive sectors such as Real Estate, Banking and Auto.

While domestic cues were enough to hurt market sentiments, the week also saw European issues re-surfacing. On Saturday (March 16), Cyprus announced that it will levy tax on its bank depositors, thus creating chaos in the country. The country's Parliament has not passed this resolution and it is on the edge of defaulting on the sovereign debt. If an urgent resolution is not found, the ECB would stop funding the banks in Cyprus, it has warned. Later today (March 22) Cyprus will report its plan on fund raising, which is again bound to impact the markets in the next week.

In the USA, FOMC's minutes of meeting were published during the week indicating that the Fed would continue to monitor the current market situation in USA and may change the amount of bond purchases depending on the health of the economy. The Fed has said that the government should not make any changes in the current policy as long as inflation remains below 2.5%.

The Fed has also noticed weakness in the world's largest economy this year and has cut their annual GDP projections from a range of 2.3%-3% to 2.3%-2.8%. It however has said that the labour conditions will slightly improve this year. It expects that the bond buying program would conclude by the end of the current year or by the beginning of the next year, and will increase the interest rates form 2015.

During the week, HSBC's flash China PMI came in, indicating a rebound in the manufacturing sector. The index reading came to 51.7 in March 2013 as against an estimation of 50.8.

Realty developer HDIL tanked 29% during the week to hit a record low of Rs 46.55 over the news reports that the credit rating agency CARE has downgraded HDIL's NCDs to 'default'. MMTC too tanked by 23% during the quarter. Core projects have maintained the declining trend as the stock dropped by 19% in the week. The stocks of Reliance have also shown a strong negative bias.