In the last week of October, there would have been hardly anyone in the markets who expected a sharp recovery which would take the Sensex close to 8500 by second week of November. The Sensex had slumped close to 7600 and a majority of the analysts had turned bearish, predicting further declines.

However, the markets never fail to surprise either on the upside or downside. In just two weeks with only seven full trading sessions, markets have recovered more than three-fourths of their decline from the highs. Almost predictably, all the analysts who were bearish only two weeks back have turned extremely bullish now. One would be hard pressed to find someone who is advising caution these days.

Sharp fall in crude oil prices and strong recovery across global markets have helped the markets to recover fast. The heavy short positions built during the days of correction and the first few sessions of the recovery were covered, which added further strength to the rally.

The frontline indices were extremely strong in the first two days of the week with the Sensex gaining close to 250 points. The markets consolidated on Wednesday and Thursday without any major selling pressure and closed the week with another sharp surge on Friday.

Oil and engineering stocks were among the biggest gainers during the week. Stocks of oil marketing companies rose sharply as they are expected to return to profitability after the fall in oil prices. Another sector which outperformed during the week was automobiles, especially two-wheelers. Select technology stocks like Wipro and Satyam also saw significant gains during the week.

The Sensex added 398 points or close to 5 per cent during the week and the Nifty went up by 130 points or 5.35 per cent over the week.

Mid-caps mirrored the movement in frontline stocks during the week and the overall gains were only marginally lower than large stocks. After the strong rally on the first two days, the mid-caps also consolidated during the middle of the week before resuming the up trend on Friday. The CNX Mid-Cap 100 index gained 163 points or 4.6 per cent during the week.

Domestic economic and regulatory action

• Tax collections for the first seven months of the current financial year have been robust and the government has reportedly hiked its internal targets much above the budget estimates. The finance ministry had set ambitious revenue collection targets in the last budget which some economists considered difficult to achieve after considering the reduction in tax rates.
  
  Direct tax collections has revved up after a subdued trend in the first few months of the year. April-October direct tax collections have increased by 27 per cent as compared to the same period of the previous year. Though the growth is lower than budget estimates, collections are expected to pick up further in the next few months.
  
  Personal income tax collections grew by 15 per cent during the period, helped by a strong growth in October. The new taxes introduced in the last budget have turned out to be good revenue generators for the government. Collections from fringe benefit tax were around Rs1,700 crore and the securities transactions tax has netted Rs1,300 crore so far during the year. Even the banking transaction tax has collected close to Rs100 crore.
  
  Service tax collections were higher by more than 60 per cent as compared to the same period of previous year. This should encourage the government to focus on expanding the number of services under this tax in future budgets. If all the taxable services are included in the tax net, collections from the service could help in easing the fiscal position considerably.

• The government has started another round of kite flying on the issue of PSU disinvestment. The finance minister has stated that the government is now considering divesting small stakes in profit making companies, excluding the large and high profile ones. The earlier proposals for disinvestment in large companies like BHEL and Nalco were shot down by the left parties. The latest statement is clearly to test the mood of the left parties and sections within the ruling alliance who are opposed to disinvestment.
  
  
• The National Council of Applied Economic Research (NCAER) has revised upwards its GDP forecast from 7.1 per cent to 7.6 per cent for the current financial year. The think tank expects better growth in the agriculture sector at 3.4 per cent as compared to 2.5 per cent forecast earlier. NCAER has forecast a year end inflation target of 5.9 per cent which is way above the projections given by the government and the RBI.
  
  
• A decline in mining and electricity generation pulled down the Index of Industrial Production (IIP) for the month of September. Industrial output growth was at 7.3 per cent for the month on an annualised basis as compared to 9.8 per cent during the same month of the previous year. Growth in manufacturing output, which does not include infrastructure output, slowed to 8.9 per cent as compared to 10.5 per cent during the year ago period.
  
  However, for the first six months of the current year industrial output growth at 8.8 per cent is higher than the 8.3 per cent reported for the same period of previous year. Manufacturing growth for the first half is at 9.9 per cent as compared to 8.8 per cent during the previous year.
  

• Wholesale price inflation for the week ended 29 October increased to 4.75 per cent from 4.49 per cent for the previous week. Prices of manufactured goods and food articles were higher during the week.

Industry developments

• The telecom sector is one area where successive governments have pushed far reaching reforms. Competition in the sector was encouraged by bringing down entry barriers which allowed new players to come in and existing players to expand further. Today, the sector is undoubtedly the biggest success story in the post-liberalisation era. This is only because we have had some farsighted and able ministers heading the telecom ministry who pushed for reforms. Unfortunately, other ministries refuse to follow suit despite the phenomenal success in telecom.
  
  One area that was left relatively untouched by competition was long distance telephony, both national and international. As a result, long distance tariffs in India remained high which held back traffic growth. This was in sharp contrast to the mobile segment where the cheapest tariffs in the world helped massive growth.
  
  The government has finally decided to open up both the National Long Distance (NLD) and International Long Distance (ILD) segments by reducing the entry fee and the revenue share. The revenue share for both segments have been reduced from 15 per cent of revenues to just 6 per cent. The initial entry fee for NLD and ILD has been reduced from Rs100 crore and Rs25 crore respectively to just Rs 2.5 crore. Besides, even those without any prior telecom experience have been allowed to start services. The new regime would come into effect from 01 January 06.
  
  Many analysts expect the reduction in revenue share to help the bottom lines of existing NLD and ILD operators like Bharti and VSNL and both stocks gained on the day after the announcement. This may not actually happen as there would be pressure from the government to pass on the entire reduction to consumers. The telecom minister has already stated that he expects tariffs to fall by 9 per cent, the same as the reduction in revenue share, though the companies are yet to agree.
  
  The lowering of the entry fee would allow mobile operators like Hutch and Idea to start NLD operations of their own. These companies, who have a nationwide presence but no NLD business, currently rely on the networks of other operators to route the calls originating from their networks. An NLD operation of their own would improve their margins and reduce their dependence on other networks. This could have an adverse impact on the existing players in the short term. Higher volumes may compensate this in future, if tariffs come down sufficiently.
  
  The existing NLD and ILD operators had demanded large cash compensation from the government for lowering the entry barriers. Their demand was reportedly in excess of Rs2,500 crore, in which the government has shown no interest so far. These companies are now demanding a refund of at least the unutilised entry fee paid by them. The government is yet to respond on this so far.
  
  
• There was no let up in subscriber additions by the telecom sector during the month of October. Total subscribers for telecom services rose by 3.24 million during the month as against 2.87 million during September of this year. Monthly subscriber additions in the mobile segment were 2.9 million as compared to 2.48 million.
  
  Total GSM mobile subscriber base rose by 2.1 million during October, the biggest ever monthly addition, to nearly 53 million. Among the operators, Bharti added 6.7-lakh subscribers to record a growth rate of close to 5 per cent as compared to September. MTNL added 80,000 new subscribers during the month while unlisted BSNL gained nearly 6 lakh.
  
  In the CDMA space, Tata Teleservices has upstaged Reliance Infocomm for the first time in monthly subscriber additions. Tata Teleservices added more tan 4.2-lakh mobile subscribers and 1.6-lakh fixed line subscribers during the month while the figures for Reliance Infocomm were 3.7 lakh and 1.3 lakh respectively. Tata Teleservices is not a listed company while its subsidiary TTML, which operates the Maharashtra circle, is listed on the exchanges.

US markets, global economy and oil

• US indices are all set for their third week of gains after gaining close to a per cent each by Thursday. Markets were helped by a decline in oil prices and a recovery in consumer demand ahead of the holiday season. Index futures were trading with gains ahead of the market opening on Friday, once gains helped by a further fall in oil prices.
  
  
• The Japanese economy expanded 1.7 per cent during the third quarter ended September, exceeding estimates by a wide margin. The recovery is led by strong consumer demand which has pushed up imports. Exports have also picked up in the last quarter as global demand remains robust.
  
  An economic recovery by Japan is critical for sustaining global economic growth as it has been running mostly on US consumer demand for the past few years. Most economists believe that US demand cannot be sustained for too long and other large economies have to step in to help sustain global growth. With the Euro zone still in deep slumber, the only large economy which can help is Japan. The growth in Japan seems to be gathering pace so far, as it has expanded for the first 3 quarters of the current year.
  
  
• Crude prices continued their down trend during the week as slowing demand in the US led to selling in the commodity. Warmer than usual weather across the US is expected to reduce the demand for heating oil during the winter months. The sharp decline in auto sales because of high fuel costs is also helping to pull down crude prices. December futures on the NYMEX have lost more than 6 per cent from the previous week's closing till late European trades on Friday.

*Disclaimer: The author may have positions in the stocks mentioned above at the time of writing this article. This analysis/report is only for the purpose of information and is not an investment advice. Readers are advised to consult a certified financial advisor before taking any investment decisions. While efforts have been made to ensure the accuracy of the information provided in the content the author or publisher shall not be held responsible for any loss caused to any person whatsoever.