New tax code will increase profitability, disposable income

The stock markets
remained range-bound in the initial part of the week due to the worsening drought situation. They followed the global bullish
trend largely due to the positive announcements by the US Fed on Thursday and gained almost three percent.

In general, there is a bullish undertone in the markets , but there is a concern of lower monsoon this year in most parts of the country. Analysts are worried that the lower agricultural yields will result in much higher prices of essential commodities like vegetables and food grains. The drought will force the government to spend more on relief packages .

The Wholesale Price Index (WPI) based inflation continued to remain in the negative territory and reported at minus 1.74 percent for the week ended August 1. However, the food articles' prices went up by around 10.2 percent compared to the same period last year.

Here are some significant events of last week that influenced the stock markets:

US market developments

The Federal Reserve painted a pleasant picture of US economic recovery in its announcement on Wednesday. This triggered a sharp rally in the global markets in the middle of the week. However, on the other hand, the retail sales numbers in the US for the month of July came below analysts' expectations as it fell by 0.1 percent. The retail sales numbers are considered a strong indicator of economic recovery as it indicates consumer confidence.

The unemployment data also came below analysts' expectations. In summary, the data suggests there are certain signs of US economic recovery but the pace of recovery is still quite slow.

Strong IIP numbers

The Index of Industrial Production (IIP) grew by 7.8 percent year-on-year during the month of June 2009. This number is significantly higher than the 2.2 percent growth recorded during the month of May. Analysts believe the sharp rise in June is due to higher demand for consumer goods and increased mining activity . Some analysts expect the strong industrial activity here will mitigate the negative impact of lower agricultural yield this year due to lesser rainfall.

New tax code

The government released the draft for a new tax code that will govern the way tax is collected in the country. The new tax code will impact the markets in many ways. The proposal to have a 25 percent flat corporate tax rate will certainly boost profitability for organisations.

FMCG and metals are two sectors that will benefit most as they are paying tax in the range of 30 percent. The proposal to increase individual income tax slabs will lead to more disposable incomes and possibly more investments in the capital markets. However, it will take some time to implement the new tax code but it will certainly improve the market sentiments in the near term.

Higher crude oil price

The crude oil price is in a range of USD 60 to 75 per barrel from the last few weeks. The weaker dollar in the global markets and improving economic conditions are prompting traders to increase their activity in energy commodities. Analysts believe the crude oil price will soon break the resistance level of USD 75 per barrel and rise to the next level of around USD 85 to 90 per barrel in the short to medium terms.

The higher fuel prices will result in a swift rise in the inflation rate as the high inflation base effect of last year will start to fade from September onwards. A higher inflation rate will force the Reserve Bank of India to tighten the monetary policy in the medium term.