Indian markets opened on a positive note on Friday as the US and other Asian markets continued their rally from the previous week. Strong gains in IT stocks like TCS and Satyam helped the indices to close the day with decent gains.

On Tuesday, the markets were more uncertain and were a little volatile. The bounce back in crude prices and the futures settlement due later in the week held the markets in a nervous state. The indices finally managed to close with gains.

Wednesday saw the indices extending their gains into the third day as IT stocks helped the markets to maintain the momentum. SAIL was another major gainer ahead of its results announcement.

Markets opened on a weak note on Thursday as oil continued it's up trend and US markets cooled a bit. Short covering on the last day of settlement in the futures segment changed the mood dramatically by afternoon and the indices closed with strong gains.

The sensex crossed the 6,700-mark again after a few months on Friday. Strong buying was seen till late in the afternoon when a sudden bout of selling saw the indices plunging dramatically.

Mid cap stocks were volatile during the week. The CNX Mid-cap 200 touched all time highs during the first party of the week and the index closed above the 3,000 mark for the first time on Wednesday. Heavy selling on Friday saw the index declining below the 3,000-mark and closing the week with marginal gains of under a per cent.

US markets, economy and oil

US markets kept up the momentum from the previous week with gains on most days of the week. Backed by strong economic data, investors continue to be positive about the markets. The minutes of the US Fed meeting held earlier in the month did not have any positive news on the interest rate front. Many analysts had believed that the detailed minutes would have clues to a gradual easing of rate hikes in future. Instead, the Federal Reserve continues to believe that inflationary pressures remain real in the short to medium term. The surge in crude prices led to a rebound in oil stocks which helped the US indices to close steady on Friday.

US GDP growth for the first quarter came in at a healthy 3.5 per cent. Preliminary estimates had put the growth at 3.1 per cent. Personal income for the month of April rose 0.7 per cent, while personal spending grew 0.6 per cent for the month. The continued growth in income and consumer spending may keep the US economic growth around the 3.5 per cent level for the second quarter also.

Crude prices bounce back over 6 per cent during the week as US crude inventories reported an unexpected drop. Inventories came down by over a million barrels while analysts were expecting a further rise. US crude oil stocks have been rising for quite sometime now. Shutdown of a large refinery in Texas led to some worries about supply of refined products ahead of peak summer demand.

Traders and hedge funds came back as buyers in crude kept the futures in an up trend throughout the week. Fresh positions were built on the July futures as the June futures are expiring in a week's time. NYMEX futures closed the week at $51.65 to a barrel.

Domestic economic and regulatory action

Inflation for the week ended 14 May declined marginally to 5.55 per cent from 5.61 per cent reported for the previous week. The price levels are maintaining a steady pace as fuel prices have not been increased. The base effect of last year has also started coming in higher keeping the rise in price index under check. Prices of manufactured goods were steady after showing a rising trend for the previous few weeks. Primary articles like basic minerals were costlier as were food articles.

Infrastructure growth for the month of April came down sharply to 3.6 per cent from 10.5 per cent reported for the same month of last year. Apart from coal production, most other sectors showed a sharp decline in output. Steel and cement output declined from their March levels, though they posted gains year on year. Crude oil production and oil refining went down as compared to previous year. Oil refining saw the sharpest fall of close to 8 per cent. The infrastructure sectors constitute over one fourth of the industrial production index and this poor performance is sure to affect the economic data for April.

The growth in infrastructure output is clearly suffering from a lack of investments in key sectors like power. There have been no major investments for the last few years except in surface transport. Even though state governments are announcing scores of power projects, the number of projects anywhere near finalisation is very low.

The EPF Organisation is meeting this weekend to consider the PF interest rates. The left parties are adamant that the rate should be 9.5 per cent. At 9.5 per cent, the EPFO will have a deficit of around Rs800 crore per year. The government has so far refused to meet the shortfall, but may be forced to give in for political reasons.

The government finally decided to re-start the disinvestment programme through the public issue route. The cabinet decided to offload 10 per cent stake in heavy equipment manufacturer BHEL. As expected, there is considerable opposition to the move from the left parties. Those who expect many more such stake sales by the government in the near future would be disappointed. These will be few and far between as the government will be forced to take a non-confrontationist stand with its supporters.

Industry update

• The decision to hike fuel prices have been deferred further. A meeting attended by the prime minister himself studied the various options and has reportedly asked the oil ministry to study the proposal in detail and come back with recommendations. The government seems to be trying desperately to lessen the extent of the price hike by tinkering with the duty structure and subsidies. At the same time, the government has to ensure that the final solution does not result in revenue losses.
  
• There are reports that the latest proposal before the government is to cut down the export benefits on refined petroleum products and use the savings to reduce the excise duty, thereby improving the margins of oil marketing companies. The reduction in export benefits is expected to result in a saving of over Rs2,000 crore for the government. Such a move would definitely impact large refiners like Reliance Industries and MRPL.
  
• The government finally approved the plan to raise the prices of natural gas for industrial consumers sold. The revision is applicable to gas produced by ONGC and Oil India from domestic gas blocks. The price hike for power and fertiliser units has been limited to 12 per cent. For other consumers, market determined prices would be applicable. This could have considerable impact for major consumers like steel companies as the difference between the current price and market price is over 100 per cent.
  
• After a couple of years of dizzying price rise, there are indications that steel manufacturers are facing decreased pricing power. Ispat Industries, one of the larger private steel manufacturers, has announced that it will reduce the prices on monthly contracts from next month. Steel prices in Europe and US have come down after many manufacturers announced price cuts to counter sluggish growth in demand.
  
• The Indian Sugar Manufacturers Association and oil marketing companies have signed an agreement to blend ethanol in petrol sold in many states across the country. The current policy is to blend petrol with up to 5 per cent of ethanol in some northern states. Suggestions have been made to increase this to 10 per cent and extent the geographical coverage all over the country in future. To offer petrol blended with 10 per cent ethanol across the country, almost a million kilo litres of ethanol will be required. Ethanol is a by-product for sugar companies and considering the high crude prices, ethanol doping makes economic sense also.
  
• Sugar production for the next season starting this October is expected at around 17.5 million tonnes. This is against the expected production of close to 13 million tonnes during the current season, which has practically come to a close as most of the crushing is over. Production during the current season was severely affected by drought in many sugarcane growing areas sending sugar prices on a sharp up trend.

Corporate moves

• Reliance Industries will invest close to $2.5 billion to develop and start commercial production from the Krishna-Godavari basin. The company expects to start production in the year 2008 and expects production to touch 40 million cubic meters per day. This is more than 50 per cent of the present production in the country, which stands at over 75 million cubic meters per day. Total domestic demand is expected to rise to around 250 million cubic meters per day by next year.
  
• In what would be a first for a large commodity company in the country, Tata Steel has announced its foray into retailing. The company will set up a steel mall in Kolkata to sell products made out of steel like furniture, utensils, etc. The concept would be introduced in other cities depending on the response to the first mall.
  
• The Hinduja group, the owners of Ashok Leyland and Gulf Oil, has lined up ambitious plans for investment in the country. The group will focus on infrastructure and healthcare segments. In a very interesting move, the group says it may also consider investing in a passenger car facility. If it happens, it will not be through Ashok Leyland, which is a manufacturer of commercial vehicles.
  
• Godrej Industries informed the stock exchanges that it is acquiring 76 per cent stake in palm oil manufacturer Krithika Agro. Further details are awaited.
  
• Public sector power major NTPC is planning to bid for some offshore natural gas blocks which have been offered under the new NELP. This is in line with the company's strategy of backward linkages to secure fuel sources.
  
• Diversified multinational General Electric, the most valuable company in the world, plans to increase revenues from the country to $5 billion by the year 2010. The company, which is a global force in heavy equipment and finance among other things, currently has a turnover of $800 million in the country.
  

Other articles by Rex Mathew

List of general reports on markets

List of general reports on finance