After the previous week's extreme volatility, markets managed to close with gains on all four trading sessions this week. Though there was considerable intra-day volatility, the sentiment remained very positive.

The week started with yet another sharp rally, continuing the momentum from the last day of the previous week. The Nifty crossed 3600 for the first time ever while the Sensex also touched a new lifetime high.

Telecom stocks notched up significant gains on Wednesday while banking stocks continued the revival, helping the indices to new highs. The day saw considerable volatility as the indices slipped sharply before recovering and closing higher.

Thursday belonged to Reliance Industries, which saw one of the biggest intra-day rallies in its history on various news flows. The stock surged almost 8 per cent before giving up part of the gains and closed 4.5 per cent higher. The Sensex crossed 12400 for the first time and fell just 17 points short of 12500.

The up trend was maintained till afternoon trades on Friday when the indices once again turned volatile. Both indices recovered after a sharp decline to close with modest gains. Nifty touched a new lifetime high, helped by a 2.5-per cent surge in ONGC.

The Sensex gained 317 points or 2.63 per cent during the week and the Nifty added 106 points or 2.98 per cent over the week.

Mid-caps and small caps under-performed the frontline stocks during the week, after outdoing them during the previous week. There was continued buying in sectors like property and construction while mid-cap cement stocks came under pressure.

The CNX Mid-Cap 100 index gained 111 points or 2.16 per cent during the week to close at a lifetime high.

Inflation

• Wholesale price inflation for the week ended 22 April declined very marginally to 3.54 per cent from 3.55 per cent reported for the previous week, mainly because of lower prices of primary agricultural products. Prices of manufactured food products increased during the week.

Industry developments

• Bank stocks, which were subdued for a long period, have been among the best performers in recent weeks. Most banks have raised their lending rates, which would help them to sustain their net interest margins for the next couple of quarters. However, upsides to net margins would be limited by rising deposit rates.

  Over the medium term, the biggest risk for the banking sector is a possible slow down in credit growth because of rising interest rates. If RBI raises short-term rates further in July as widely expected, commercial banks would also be forced to push up deposit and lending rates. Though the consensus forecast is a 25-basis point hike by RBI in July, some expect a 50-basis point increase.

  Record oil prices and rising interest rates globally may force the RBI to hike rates even before the scheduled quarterly meeting in July. The US Fed is likely to increase short-term rates by 25 basis points to 5 per cent per annum next week. The RBI governor indicated this week that short-term rates can be adjusted any time if there are significant changes in the global scenario.

  In the event of any slowdown in credit growth in future, banks may not have the same flexibility to raise lending rates even if the central bank continues to hike rates. On the other hand, pressure to raise deposit rates would go up with every rate hike by RBI. This would squeeze the net interest margins of margins.

  So far there are no signs of slow down in credit growth. Even in the home loan segment, which has seen rates go up by nearly 200 basis points in the last one year, there is no visible slowdown, as property prices have remained firm.

  Another significant challenge before banks would be the implementation of Basel-II norms. The RBI governor this week indicated that Indian banks are expected to start implementing the norms from 31 March 2007.

  The banking sector would need to raise significant amount of capital to meet the norms. The new norms call for higher reserves to take care of various risks. Banks would be required to have higher capital adequacy to cover operational risk and market risk apart from credit risk.

  It is estimated that the Indian banking industry would need around Rs60,000 crore as additional capital to fully implement the Basel-II norms. The RBI has indicated that, commercial banks would be allowed some flexibility to meet the norms depending on their preparedness.

  In any case, frontline commercial banks are less likely to get any significant extension in implementing Basel-II. They need to raise the additional resources in less than a year even as the possibility of a slow down in credit growth looms.

US markets, global economy and oil

• Strong retail sales growth and excellent corporate numbers helped US markets to close with strong gains during the week. The decline in oil prices and subdued employment growth for the month of April helped ease concerns of continued rate hikes by the US Fed.

  The Dow index closed the week with gains of nearly 2 per cent, very close to its all time high while the S&P 500 closed more than a per cent higher. Technology stocks were relatively subdued and NASDAQ added close to a per cent during the week.

• Average wage rates in the US increased during April even as job additions were lesser than expected. One of the key determinants of US Fed's interest rate policy is the condition of labour markets. Lower job additions have heightened expectations that US Fed would take a pause before increasing interest rates again.

  Despite the rise in wage rates, consumer credit growth in the US has been lower than expected for the month of April. Economists believe that past interest rate hikes by the Fed have started affecting retail credit growth, which may further prompt the Fed to take a pause.

• Crude oil started the week on a strong note, rallying 2.5 per cent on Monday. The rally followed aggressive statements by Iran over the nuclear dispute, which raised concerns of supply disruptions. An unexpected surge in US inventory of crude oil and refined products triggered a decline. The fall was accentuated by data showing little growth in US retail fuel demand as compared to last year and by Thursday crude oil fell below $70 per barrel.

  Near month futures on the NYMEX lost over 2.5 per cent for the week and closed at $70.19 per barrel 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.