Macro worries on inflation driven by high prices of crude and food, and the possibility of interest rate hikes caused the markets to marginally dip in April ’11. Interest rate hikes by the Chinese Central Bank and the European Central Bank added to the fears of monetary tightening with the Sensex closing down 1.6% at 19,136 and the Nifty closing down 1.4% at 5,750. Reflecting the greater domestic retail participation levels, the month saw mid and small capitalization stocks outperform large caps. For the month FII’s were net buyers of USD 1.6 Billion (buyers of USD 1.58 Billion in March ’11), while Domestic mutual funds were net sellers of USD 103 million (buyers of USD 86 million in March ’11). Sectorally Auto, Consumer Durables, Capital Goods, FMCG, Health Care, Metal and PSU indices outperformed, while the indices for Banks, Software, Oil& Gas, Power and Real Estate underperformed the Sensex.

In economic data flow, The Index of Industrial Production (IIP) reported for the month of February 2011 showed a growth of 3.6% YoY (3.9 %YoY in January 2011 as per revised data). For the period April 2010 to February 2011, IIP grew at 7.8 % YoY (compared to 10% same period last year). On a sectoral basis, in April 2010- February 2011, Manufacturing grew by 8.1% YoY, Mining by 6.5%YoY (9.6% same period last year) - largely being impacted by transportation bottlenecks and environmental clearances, and Electricity by 5.4% YoY. On a use basis, in April- February 2011, Capital Goods grew by 8.7% and Growth in Consumer Goods of 7.5% was driven by growth of 21.8% YoY in Consumer Durables. The Manufacturing Purchasing Managers Index for April 2011 which is a leading indicator of economy came in at 58 (57.9 in March 2011). The PMI subcomponents reflected that raw material price are expected to rise strongly consequently causing a rise in output prices in face of a strong domestic demand environment and international commodity price pressures. The PMI numbers are also reflective of the resilience of Indian manufacturing sector in face of tightening of monetary policy and high inflation.

Corporate results of ten BSE Sensex companies that have reported March ‘11 ended quarterly results so far, showed a 13.7%YoY Sales growth with Profit after tax growing 13.9% YoY inspite of input pressure impacting operating margins due to strong balance sheet positions that kept interest costs in check. For a larger universe of companies that reported March ’11 quarter results by end of April ’11, sales grew at a robust rate of 20% plus YoY , however margin pressures due to input cost rise led to net profit growth lagging sales growth for these companies. The Indian Metrological Department (IMD) has forecast the southwest monsoon 2011(summer rainfall) to be normal- 98% of long period average with a low probability of deficient rainfall. The South Asia Climate Outlook Forum too predicted a normal monsoon rainfall in 2011 for South Asia, based on the fact that La Nina weather phenomena that aids monsoon in the region would continue into June. All this gives hope for a good summer crop production which will help alleviate food inflation and propel agricultural growth on which 60% plus of the population depends on for income.

In other news of economic importance, Standards and Poor’s Ratings Services affirmed India’s ‘BBB-’(Investment grade) long term and A3 (Investment grade) short term rating with a stable outlook. S&P stated that “The ratings on India reflect the country's good economic growth prospects and its fairly strong external position. Positive investment trends further underpin the ratings, with foreign direct investment and portfolio investments covering a large share of the current account deficit. Nevertheless, the country's weak fiscal profile and structural problems temper its strengths. Structural problems not only constrain efficiency, but also preclude a large share of the population from benefiting from the country's rising prosperity”.

At the time of writing this, RBI came out with Annual Monetary and Credit Policy for Financial Year ending March 2012 emphasizing “High and persistent inflation undermines growth by creating uncertainty for investors, and driving up inflation expectations. An environment of price stability is a pre-condition for sustaining growth in the medium-term. Reigning in inflation should therefore take precedence even if there are some short-term costs by way of lower growth". As a result, RBI took several policy related actions. Repo rate (rate at which banks borrow from the RBI) and Reverse Repo rate (rate at which banks lend to the RBI) are hiked by 50 basis points each to 7.25% and 6.25% respectively. Henceforth, Repo rate will be the sole policy signaling rate, while the Reverse Repo will be pegged at 100 basis points below the Repo Rate. Furthermore, the RBI has introduced a new liquidity window - known as ‘Marginal Standing Facility’ or MSF - for banks to borrow up to 1% of their net demand and time liabilities. The rate of interest on MSF would be 100 bps above the repo rate. Bank Rate at 6% and Cash Reserve Ratio at 6% were left unchanged. Taking cognizance of higher interest rates across maturities and a prelude to deregulation of the savings bank deposit rate of banks, RBI raised the savings rate to 4% from 3.5%.

To drive the financial inclusion initiative, Banks have been asked to ensure at least 25% of their new branches are set-up in tier 5 and 6 cities. In relation to financial markets - RBI assured to shortly introduce guidelines for Credit Default Swaps; allowing short sale of Government Securities for up to three months (up from five days now); and, allowing FII’s to churn up to 10% of the market value of their government security portfolio within a year. On the regulatory front, provisioning requirement on certain categories of non-performing advances and restructured assets is increased to better manage the risks arising from lower credit quality of such assets. Additionally, investments of Banks in liquid schemes of debt oriented mutual funds is being subjected to a limit of 10% of net-worth to prevent any risk to systemic stability as a result of round tripping of funds. The policy action overall aims to contain inflation by reigning in demand side pressures, while anchoring inflation expectations; and expects to sustain growth in the medium-term by containing inflation. The RBI projects GDP growth of 8% for FY12, and WPI inflation of 6%, with upward bias, by March 2012.

In May ’11, the markets will look to the remaining corporate results reported for quarter and fiscal year ended March ’11 to get direction. Monetary Policy moves by central bankers in emerging markets like China, Brazil and developed markets like Europe and US will continue to influence global investor risk appetite.