Frontline indices extended their gains to the third week after five weeks of losses in May and early June. The week's global rally in equities was only because of some soft language used by the US Fed in its statement following the interest rate hike announcement.

The week started on a disastrous note as the indices took a nosedive on Monday, each ending 3.5 per cent lower. Investors and traders once again started losing confidence as much of the previous week's gains were lost in a single session. Metal stocks and heavyweights, such as ONGC and Reliance Industries, lost heavily that day.

Earlier, on Sunday, the markets gave up all the initial gains and closed flat during a one hour special session conducted to check the upgraded hardware systems at the NSE.

Markets staged a modest recovery on Tuesday, helped by a recovery in Asian markets. On Wednesday, indices recovered from a two per cent fall in morning trades and closed with marginal losses.

Indices were firm for most of the session on Thursday ahead of the important US interest rate announcement. They dropped sharply in the closing hour and closed with very modest gains.

Friday saw one of the biggest single day advances ever, as the frontline indices ended with spectacular gains of 4 per cent each. The global rally, which came on hopes of an end to US interest rate hikes, gave a substantial lift to the indices.

The Sensex added 208 points or 2 per cent during the week and the Nifty gained 85 points or 2.8 per cent over the week.

Mid-caps and small caps corrected this week after substantially outperforming the large caps during the previous week. They declined during the first three days of the week before staging a modest recovery on Thursday. Gains on Friday, however, were not enough to wipe out the losses suffered during the earlier part of the week.

The CNX Mid-Cap 100 index closed the week lower by 29 points, or 0.73 per cent.

Domestic economic and regulatory action

• After remaining in deficit for the first three quarters of the financial year 2005-06, the country's current account balance showed a surplus of $1.8 billion for the fourth quarter. This significant turnaround was achieved through a combination of acceleration in export growth, decline in import growth and sustained rise in net invisibles.

  Export growth improved to 22.9 per cent during Jan-March 2006 as compared to 20.7 per cent for the same quarter of previous year. Import growth was substantially lower at 20.1 per cent as against 59.1 per cent. Net invisible receipts increased 22.6 per cent during the quarter, helped by a 40.7 per cent jump in receipts from software exports and 16.9 per cent rise in remittances by those working abroad.

  The current account turnaround during the fourth quarter has helped limit the deterioration in the external account for the full year 2005-06. Though the current account deficit for the full year has nearly doubled to $10.6 billion from $5.4 billion during the previous year, the deficit is still much lower than earlier estimates.

  External account situation during the current year would depend on sustained strength in exports, both merchandise and invisibles like software and other services. Import growth may not decline further, as long as oil prices remain high and domestic consumption remains strong.

• Net capital account receipts for the full year 2005-06 has declined to $25.6 billion from $31.5 billion during the previous year. This would not have been normally expected during a year which saw increased FDI and FII flows into the country.

  The major reason for the decline in net capital receipts was an outflow of $1.4 billion under other banking capital as against and inflow of $4.8 billion during the previous year. During the financial year SBI repaid its India Millennium Deposits (IMD) which saw significant outflows.

  The corporate sector became less interested in overseas debt during the year and external commercial borrowings (ECB) declined substantially to $1.6 billion from $5 billion during the pervious year. Short term borrowings also declined to $1.7 billion from $3.8 billion.

  FDI flows increased to $5.7 billion during 2005-06 from $3.2 billion for the previous year while FII inflows jumped to $12.5 billion from $8.9 billion. NRI deposits increased to $2.8 billion from a net outflow of nearly $1 billion for the previous year.

• Wholesale price inflation for the week ended 17 June increased to 5.44 per cent from 5.24 per cent reported for the previous week. Prices of fuel and primary food articles sustained the up trend during the week.

Industry developments

• 26 bidders, including 8 foreign companies, have submitted a total of 54 bids for the 10 coal bed methane (CBM) blocks which were offered recently for exploration and production. This is a substantial improvement from the earlier 2 rounds of bidding for CBM blocks, which saw relatively lacklustre interest.

  This improved interest is mostly because of reasonably large CBM discoveries made earlier. Companies like ONGC and Reliance, which were awarded exploration blocks in the earlier rounds, have discovered CBM reserves in four blocks with total in place reserves in excess of 6 trillion cubic feet. Commercial production from these blocks may start as early as next year and average production could increase to as high as 10 million standard cubic metres per day by 2010.

  There are also reports that the in place natural gas reserves in one of the fields discovered by Reliance in the KG basin has been re-assessed to more than 35 trillion cubic feet. The revised reserves is nearly three times the original estimate and, once finally verified and confirmed, would significantly increase the country's discovered gas reserves. It would also lead to a significant revaluation of the oil and gas assets of Reliance Industries.

  Major global oil companies are also showing much more interest in getting domestic oil exploration blocks in the next round of bidding under NELP. Some of them have tied up with large domestic companies while others are expected to bid on their own.

  The recent discoveries and rising interest in exploration blocks indicate that there has been a reassessment in the hydrocarbon potential in both offshore and onshore blocks in the country. Companies which have already made investments in domestic oil & gas exploration would find significant opportunities in the medium term. High energy prices would ensure that returns from these investments are significant.

US markets, global economy and oil

• US markets had a good week as the indices rallied on Thursday on renewed hopes that Fed would take a pause in its rate hike cycle. The final revision of Jan-March quarter US GDP growth to 5.6 per cent led to expectations that corporate profitability growth would be sustained. Corporate developments were also positive with some large merger deals announced.

  For the week the Dow index rallied 1.5 per cent while S&P 500 closed with gains of over 2 per cent. Technology stocks were better off and the NASDAQ index gained close to 2.5 per cent over the week.

• As widely expected, the US Fed raised short term interest rates for the 17th time by 25 basis points to 5.25 per cent annually. A significant toning down of the language in the statement released by the Fed has raised considerable hopes that the US central bank may be close to the end of its rate hikes.

  The statement said further rate hikes 'maybe needed' if economic data point towards rising inflation and no significant slowdown in economic growth momentum. This is a major change from earlier statements when the Fed usually stated that future rate hikes are probably required to rein in inflation.

  The Fed is expecting economic growth in the third and fourth quarters to slow down enough so that price pressures ease on their own without further policy action. Even then, the Fed may have to raise rates by another 25 basis points in August as most recent economic data continue to give mixed signals.

  Further upward revision of first quarter GDP growth number may indicate that part of the momentum may spill over into subsequent quarters and growth rate for the just concluded quarter may be higher than expected. Consumer spending remained robust with a 0.4 per cent rise for the month of May.

  US consumer inflation for the Jan-May period is above 5 per cent compared to around 3.5 per cent for the same period of previous year. Core inflation, excluding food and fuel prices, has inched above 3 per cent and should keep the Fed worried. Employment growth has not shown any signs of slow down so far and should help sustain consumer spending.

  The real risk is that the US economy would not cool down as much as expected and oil prices would rise further which would push up inflation. In such a scenario, the Fed would be forced to continue with its rate hike and some analysts expect the Fed rate to be around 6 per cent by the end of the year or early next year. That would surely exert considerable pressure on equity markets, globally.

• Crude oil prices recovered substantially during the week on multiple news flows and developments. Concerns over rising violence in the Middle East kept prices on an up trend during the early part of the week. Aggressive statements from Iran and western countries over the Iranian nuclear dispute also led to a rally in oil prices.

  The US and other western countries want Iran to respond at the earliest to a peace deal proposed by some European countries. However Iran wants more time, claiming that it needs to study the proposal in detail before coming out with a response. Towards the end of the week, Iran rejected a fresh ultimatum and said it would respond only by August.
  
  Prices went past $73 by Thursday as US inventory of crude oil and refined products were lower than expected. Near month futures on the NYMEX gained $3 per barrel for the week to close at $73.85 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.