Positive global cues following EU deal also help perk up sentiment on bourses

The stock markets, on Friday, rose smartly by more than 2.50 per cent on expectations of major changes in the domestic economy under the leadership of the Prime Minister Manmohan Singh, who has assumed responsibility of the Finance Ministry. Apart from this, the positive global sentiments after the European Union leaders agreed not to allow major defaults by member-countries also aided the rally.

(After the Finance Ministry late on Thursday unveiled the draft guidelines of the General Anti-Tax Avoidance Rules (GAAR), Sensex, on Friday, clocked its biggest single-day gain in 2012 so far, making investors richer by Rs.1.17 lakh crore. Market participants cheered the Finance Ministry’s proposals of a monetary limit for invoking GAAR and use of the tax-avoidance rules only in cases where FIIs choose to take the benefit of double tax avoidance treaties, among others. The surge was across the market as nearly 1,870 of the 2,982 stocks rose with investor wealth shooting up to Rs.61.52 lakh crore, according to PTI reports)

“The hope of a re-implementation of reform agenda fired the market rally,” said G. Chokkalingam, Chief Investment Officer, Centrum Wealth Management Ltd.

The 30-share Bombay Stock Exchange sensitive index, Sensex, shot up by 439.22 points or 2.59 per cent to close at 17429.98. All sectoral indices ended in the positive territory. On the National Stock Exchange, the broader 50-share Nifty closed at 5278.90, a gain of 129.75 points or 2.52 per cent.

Reflecting the sentiment that the Prime Minister will do everything to boost the domestic economy, stocks related to the economy made a strong come back on the last day of trading for the week. Capital goods index led the rally with a rise of 3.65 per cent, followed by power (3.55 per cent), banks (3.49 per cent), metal (3.44 per cent) and realty (2.47 per cent). The rethinking on the controversial tax issues, with the exit of Pranab Mukherjee from the Finance Ministry, perked up sentiments on the bourses. Prime Minister Manmohan Singh took charge of the Finance Ministry on Tuesday and said that the Government would take steps to revive economic growth. He was the original architect of the liberalisation of the Indian economy which commenced in early 1990s’.

“The expected dilution in the General Anti-Avoidance Rules (GAAR) changed the sentiment in the market,” said Mr. Chokkalingam. “While this being the main positive for the market, it believes that the government will be able to pass the pending bills on pension, insurance and banking in the monsoon session of Parliament”, he said, adding, “Once the government takes a reform path, including allowing foreign direct investment in multi-brand retail sector, it will fire further rally in the stock markets and the foreign exchange market.”

Meanwhile Chief Economic Adviser Kaushik Basu has also stated, on Friday, that the economy was expected to bounce back from October onwards . In a move to curb avoidance of tax by foreign financial institutions, the government announced GAAR in the last Union Budget, which it deferred by a year.

However, the markets have also taken cue from the global sentiments. In a significant announcement, the European Union leaders said that the European Stability Mechanism would be able to lend directly to banks to recapitalise them and without preferential seniority status. “Eurozone leaders also agreed to take emergency action to bring down Italy's and Spain's spiralling borrowing costs and to create a single supervisory body for eurozone banks by the end of this year, a first step towards a European banking union,” said Dipen Shah, Head of Fundamental Research, Kotak Securities.

“We maintain our view that markets trends would be broadly determined by the on-going developments in eurozone debt crisis, domestic inflation and government reforms,” Mr. Shah added. With European Union leaders intent on not allowing major defaults or bankruptcies, the focus will likely shift to inflation and government reforms.

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