The week started on a disastrous note as the indices tumbled around 3.5 per cent each on Monday on sustained weakness in global markets. Record oil prices unnerved investors across the globe and, ironically, oil stocks bore the brunt in India because of the rising subsidy burden. The fall was led by index heavyweights ONGC and Reliance Industries.

After a modestly weak session on Tuesday, indices lost close to 2 per cent each on Wednesday. The sharp fall of the Rupee against the US Dollar raised fears of a further slowdown in overseas portfolio inflows into the country. Leading tech companies, TCS and Wipro, could not excite the markets with their results, the way Infosys did during the previous week.

Technology stocks were among the biggest losers on Wednesday, though the services export companies would gains considerably from a falling Rupee. Autos were another sector which got severely beaten during the early part of the week on fears that rising fuel prices would dampen demand for vehicles.

US Fed chairman Ben Bernanke played the pied piper for global equity markets this week with his statements on inflation and growth in the US, which would determine the Fed's interest rate policy. Markets probably read too much in his statements and indices soared to post some of the best daily gains in recent months. India was no exception as the Sensex ended more than 3 per cent higher.

The optimism lasted only a day as most of the gains were promptly given up on Friday. Most analysts came to the consensus view that the US Fed has not yet taken a decision and much would depend on economic data, which still remain inconclusive. Frontline indices closed the day with losses of around 2.5 per cent each.

The Sensex lost 592 points or 5.54 per cent during the week and the Nifty gave up 178 points or 5.7 per cent over the week. Sensex closed above the 10000 mark but the Nifty slipped way below 3000 level.

Mid-caps and small caps also came under pressure after remaining sideways during the previous week. Stocks of some of the companies, which declared weak numbers, were beaten down while good numbers were largely ignored. Though mid-caps also surged on Thursday, they gave up their gains on Friday. The CNX Mid-Cap 100 index closed the week lower by 238 points, or 6.14 per cent.

Domestic economic and regulatory action

• Though the companies, which have come out with first quarter numbers, have shown excellent volume growth, rising costs are putting pressure on margins. The situation is the same across most sectors, manufacturing as well as services. Strong volume growth is leading to a healthy rise in the bottom line, which to some extent masks the pressure on margins.

  The adverse effect of rising costs was most visible in the results of Reliance Industries for the first quarter. Despite a 38 per cent surge in top line, the company could manage only a meagre 10 per cent increase in net profits. This is despite the fact that petrochemical prices remained high and the company managed to achieve record refining margins.

  IT service companies have also seen pressure on margins, though they continue to enjoy strong volume growth and stable pricing. Salary levels are going through the roof and most companies have raised average salaries by around 15 per cent each during the first quarter. There is intense competition between these companies to attract talent, which would push up compensation levels further.

  Banking stocks, especially those of PSU banks, have been among the worst performers on fears that rising interest costs would eat into margins. The first few set of numbers from PSU banks confirms these fears with the added worry of higher provisions. Private sector banks are keeping up their performance, helped by strong growth in retail lending and fee based income.

  Even core sectors like cement and engineering are facing cost pressures. Cement companies have seen freight and energy costs going up though they have recorded probably the best ever quarterly numbers on the back of record realisations. Engineering companies are flush with orders, but their bottom line growth is lagging.

  The pressure on margins is clearly a pointer that, after expanding mostly through efficiency gains for the last many years, most sectors have now reached near full utilisation of capacities. The industry saw this coming last year itself and had started increasing investment spending.

  From now on, though growth rates would continue to remain excellent, margins would progressively decline for most sectors. As a result, bottom line growth would become less and less robust and companies would be more and more vulnerable to external shocks.

  Declining growth in profitability should lead to a PE downgrade for the market as a whole. Hopefully, this has happened to a considerable extent. But that would mean the potential for any significant market rally is highly limited for this calendar year at least. Towards the end of the year, hopefully, global factors would have settled down and we can start discounting 2007-08 earnings.

• Earlier this month there were unconfirmed media reports that the government would allow oil-marketing companies to automatically raise retail prices if the Indian crude basket rises above $70 per barrel. The move was widely welcomed and had led to some gains for stocks of these PSU companies.

  But this week, the oil minister has ruled out such plans even though price of the Indian crude basket moved well past $70. The government is now reportedly thinking of asking standalone refiners to shoulder some additional burden, as refining margins have risen.

• Wholesale price inflation for the week ended 08 July declined to 4.68 per cent from 4.96 per cent reported for the previous week.

US markets, global economy and oil

• US markets were volatile during the week, but the broader indices managed to close with modest gains. US indices surged by the middle of the week after a testimony by the Fed chairman led to expectations that the central bank would take a pause from interest rate hikes.

  Closer analysis of his statements saw most of the gains being given up the next day. Indices closed lower on Friday as well, despite healthy results and guidance from some of the large companies. Technology stocks were subdued during the week after large companies like Intel and Dell came out with lower guidance for the rest of the year.

  The Dow gained 1.2 per cent during the week while the S&P 500 added 0.3 per cent. The weakness in technology stocks saw the NASDAQ slipping 0.8 per cent over the week.

• Crude oil gave up all of last week's gains on hopes of a settlement to the Middle East crisis. However, such hopes were belied towards the end of the week and prices recovered from their lows. Near month futures on the NYMEX finally settled at $74.57 for the week, lower by around 3 per cent from previous week's closing levels.

  Statements from the OPEC that current oil prices are very 'uncomfortable' also led to the decline in prices this week. A top OPEC official said prices of around $60 per barrel would be acceptable, as the world has got used to those prices over the last couple of years. The OPEC is clearly worried that very high oil prices would hurt the global economy badly and would lead to lower global demand for oil, which would affect the sustainability of prices at current levels.

*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.