The week started on a most disastrous note, shaking the confidence of even the few who remained hopeful after the previous week's fall. After opening with gains, the indices dropped more than 10 per cent and trading was suspended by the exchanges for one hour.

It was only the second such trading suspension in history and, as usual, was triggered by rumours of a payment crisis at major brokerages. Traders sold further to meet margin pressures and frontline stocks fell like nine pins in the absence of any buying support. Many large cap stocks were down more than 20 per cent each when trading was suspended.

Indices recovered as trading resumed in the afternoon and finally closed the day with losses of around 7 per cent each.

Tuesday saw a sharp bounce back as most Asian markets recovered. Frontline indices closed the day with gains of nearly 3 per cent each.

The recovery was short-lived as the markets gave up all the early gains and closed with substantial losses on Wednesday. The volatility continued on Thursday as the indices pulled back after early losses on short covering on the last day of futures settlement.

Recovery across global markets, including the US, helped the indices to notch up strong gains in early trades. Part of the gains was given up in the afternoon as traders booked profit ahead of the weekend.

The Sensex gave up 130 points or 1.19 per cent during the week and the Nifty lost 37 points or 1.14 per cent over the week.

Mid-caps were worse off than the frontline stocks on Monday and the mid-cap index had lost more than 13 per cent when trading was suspended. The recovery in smaller stocks over the week was slower than large caps and many mid-caps are yet to recover from their lows to any significant extent.

The CNX Mid-Cap 100 index lost 128 points or 2.79 per cent during the week.

Domestic economic and regulatory action

• The NCAER has come out with its initial GDP growth forecast for 2006-07. The economic think-tank expects the economy to expand at 7.7 per cent as compared to 8.1 per cent during the previous year. It has forecast lower growth rates for all major sectors during the current year.

  Higher fuel prices and interest rates are the main reasons for lowering the growth rate forecast. Retail fuel prices would be increased shortly and the RBI is expected to raise short-term interest rates in July.

  Growth rate for industry is forecast to come down to 8.3 per cent from 9 per cent during the previous year. The services sector would grow at a marginally lower 9.6 per cent as compared to 9.8 per cent for 2005-06.

  The weather department has predicted a slightly lower than average monsoon, despite the early onset. This has prompted NCAER to forecast agricultural output growth at 2.1 per cent as compared to 2.3 per cent for the previous year.

• The OECD is even less bullish on the prospects for the Indian economy for the current year. In its economic outlook released this week, the OECD expects Indian GDP growth to decline to 7 per cent for 2006-07.

  The organisation said part of the growth experienced by India during the last three years was cyclical in nature, which may reverse itself. Interest rates are expected to go up during the current year as the RBI adopts more policy tightening to ward off inflation.

  Not surprisingly, the OECD says the slowdown would come because of supply concerns rather than a drop in demand. It says some sections of the economy are seeing a slowdown in output because of capacity constraints. Further increases in interest rates and tighter fiscal policy measures by the government would hamper additional investments in capacity.

• The finance minister stated in parliament that core inflation, excluding fuel and food prices, has shown a secular decline. The government is confident that wholesale inflation for the current year would remain below 5 per cent even if retail fuel prices are increased.
• Wholesale price inflation for the week ended 13 May increased to 4.32 per cent, the highest in more than two months, from 3.96 per cent reported for the previous week. The rise in inflation rate was mainly because of higher prices of vegetables, pulses and food grains. Prices of select manufactured products also rose modestly during the week.

US markets, global economy and oil

• US markets maintained the weak trend during the early part of the week. An attempt at recovery on Tuesday was beaten back by an afternoon sell-off before the indices finally closed with marginal gains on Wednesday. Thursday saw a strong recovery and the up trend was sustained on Friday as well.

  The Dow and S&P 500 indices gained more than a per cent each while the NASDAQ ended nearly 0.5 per cent higher for the week.

• The IMF believes monetary tightening by major central banks across the globe is required to ensure sustained growth of the global economy. Most major economies continue to witness strong growth momentum and some of them are facing capacity constraints. As commodity prices are also at record levels, inflationary pressures would continue to rise and, if unchecked, could threaten growth sustainability.
• Crude oil prices were volatile for most of the week, but finally closed with gains. Even though US oil inventories continued to rise during the previous week, some of the supply concerns persisted. Supplies from Iraq could get disrupted if some of the political groups go ahead with their agitations.

  Diplomats are in the process of putting together a new deal to avert a crisis over the Iranian nuclear programme. Countries like the US and the UK are still maintaining a tough stand, but Russia and China would prefer a more accommodative approach. Iranian leaders reiterated this week that they would continue their nuclear programme, which they claim is for peaceful purposes.

  Meanwhile, OPEC is meeting next week to consider production quotas for member countries. Though some of the more aggressive members like Venezuela are arguing for a cut in output, the oil cartel is likely to keep current production levels. Earlier this month OPEC had stated that there is excess supply in the market, which led to a decline in crude oil prices.

  Near month futures on the NYMEX closed the week at $71.37, higher by around 4 per cent from previous week's close.

• US government believes that it won't be easy for Iran to cut off oil exports in the event of a conflict with western countries over the nuclear issue as the country is heavily dependent on oil revenues. Oil exports constitute more than 80 per cent of Iran's total export revenues and a significant portion of government revenues. Higher oil prices have led to a revival in economic growth in the last couple of years and the country needs to sustain these growth rates to achieve domestic stability.

  Even if Iranian oil is taken off the market, US government officials estimate that major consuming countries could handle the situation. Oil stockpiles in member countries of International Energy Agency (IEA) are enough to take care of a supply disruption in Iran for up to 4 years. However, the psychological impact of such a disruption on the oil markets would be high and would most certainly push prices closer to $100 per barrel.
  

*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.