Global uncertainties coupled with domestic headwinds will continue to haunt our markets this week. Indian benchmarks are likely to sink but the fall would be limited. Any attempts of recovery will face stiff resistance, as market participants are awaiting a chance to offload their holdings.

Though RBI's move to stem the rupee slide against the dollar worked last week, market participants are sceptical and expect the rupee to reverse direction soon as foreign investors lack confidence in India. Unless some structural shift happens at the policy level, they are unlikely to return to the Indian shore.

Key benchmark indices tumbled to a two-year low as the widely expected cut in cash reserve ratio, despite tight liquidity in the system, did not materialise in the much-awaited RBI mid-quarter monetary policy review on Friday. The continuous squeeze in liquidity is likely to keep the market under pressure, particularly the infrastructure stocks.

Fears that economic slowdown and higher interest rates will hit corporate profitability turned out to be true, as the advance tax payments made by the companies remained flat in December compared with the same quarter of the previous year.

TAX REVENUES

In fact, the advance corporate tax paid by top Mumbai-based corporate houses was marginally down in the first three quarters of this fiscal, according to Income-Tax Department sources. For the December quarter, these companies, which contribute about 70 per cent of overall corporate tax collection in Mumbai, paid Rs 16,691 crore (Rs 16,750 crore).

The fall in advance tax collection is disturbing, considering that companies pay about 75 per cent of their tax commitment for the entire fiscal in the December quarter. Economists are now worried that this will impact tax revenues, and thus the fiscal deficit.

Even global cues failed to lift the sentiment.

The US Federal Reserve refrained from taking new action to bolster the world's largest economy despite mixed economic data. Consumer sentiment hit a 6-month high and mortgage refinance application rose, but retail sales grew less than expected, signalling that consumer was holding back spending.

The recent European summit failed to find a solution to the sovereign debt crisis as Euro zone members agreed to a new tax and budget pact. Though these leaders agreed to bring forward the launch of the bailout fund to a year earlier, there was no unanimity as all members did not sign onto the EU treaty. Meanwhile, the zone's bailout fund has denied it will include a warning to potential investors that the euro zone could break up. The denial follows a report in the Financial Times of a draft prospectus setting out risks that investors should consider before putting in money, including a euro zone break-up or the disappearance of the single currency.

China's leading index decreased and bank lending grew at a slower than expected rate indicating a slowdown. Japanese consumer confidence slipped for the first time in seven months reflecting the uncertainty over the economic outlook.

>badri@thehindu.co.in

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