India Markets Tuesday Wrap-Up

by: Equitymaster

Indian stock markets witnessed a strong session today. The indices began the day on a positive note. Strong buying activity throughout the session caused indices to scale higher. The momentum was sustained in the final hour of trade as well and the indices closed well above the dotted line. While the BSE-Sensex closed higher by around 139 points (up 0.8%), the NSE-Nifty closed higher by around 43 points (up 0.8%). The BSE Mid cap and the BSE Small cap also did well to notch gains of 0.9% and 1.2% respectively. Gains were largely seen in rate sensitive stocks such as realty and consumer durables.

As regards global markets, Asian indices closed mixed today while European indices have opened weak. The rupee was trading at Rs 49.21 to the dollar at the time of writing.

Banks are seeing continued tightness in liquidity despite the Reserve Bank Of India (RBI) 0.5% cut in the Cash Reserve Ratio (CRR) in January. RBI Deputy Governor, Subir Gokarn, stated that the central bank may even look at a further CRR cut if the systemic liquidity conditions continue to be tight. With inflation slowing to 7.65% as per latest available figures and tight liquidity the RBI is expected to opt for further monetary easing in its March 15 policy review.

Rural Electrification Corp. (REC), a leading financier of the Indian power sector plans to raise up to Rs 30 bn (US$ 610 m) via tax-free bonds. The company plans to raise these funds for a long-term period mainly in the 10-year and 15-year tenure segments. The base size of the issue is Rs 15 bn and REC has an option to retain an additional Rs 15 bn if there is more demand for the issue, which is expected to hit markets in the beginning of March. REC joins the ranks of other companies such as National Highways Authority of India (NHAI) and Indian Railway Finance Corp (IRFC), which can each raise Rs 100 bn. Housing and Urban Development Corp (HUDCO) and Power Finance Corporation (PFC) on the other hand can each raise upto Rs 50 bn.

Coal India is expected to incur an additional burden of around Rs 65 bn per annum on account of a 25% per cent increase in workers' wages. It has signed a new pact called the National Coal Wage Agreement - IX. This wage hike is expected to benefit 370,000 workers of the firm. Minimum basic wages have been increased from Rs 8,360 per month to Rs 15,713 per month with effect from July 1, 2011. Also as per the new pact, the house rent allowance in non-urban areas would stand at be 2% of basic salary per month instead of fixed amount of Rs 150 a month.

Currently, the company and its subsidiaries spend about Rs 200 bn annually on salaries of workers. This amounts to around 40% of the cost of production of coal, making it a very labour intensive industry. This increase in wage rates would have a direct impact on the bottom line of the company, which it hoped to counter by increasing its coal production.