Markets opened the week in a disastrous fashion with the frontline indices losing 2 per cent each on Monday. Profit booking on Monday morning gathered pace by late afternoon on confusion regarding imposition of additional margins by BSE.

Sharp decline in afternoon trades continued on Tuesday as the indices lost all their early gains and closed with marginal losses. The surge in oil prices and uncertainty in the US and other global markets also led to the weak sentiment.

The indices made a sharp bounce back on Wednesday and regained much of the ground lost on Monday. The rally was broadbased and even the oil stocks joined the up move.

Markets continued their merry ways on Thursday as well and the Sensex managed to close above the 7800 mark yet again. Pharmaceutical and select automobile and banking stocks led the rally.

Worries about continued FII inflows led to nervousness among traders on Friday and the indices closed with moderate losses. Weakness was visible in most frontline stocks.

Mid-caps were in a different zone after the losses of first two days of the week. The mid-cap index recovered from its losses in a hurry on Wednesday and went on to touch record highs on the last two days of the week. The CNX Mid-Cap 100 index closed the week above the 3600 mark for the first time ever.

Domestic economic and regulatory action

• The Index of Industrial Production (IIP) expanded 11.7 per cent for the month of June, the second consecutive month of double-digit growth. IIP growth for the first quarter is at 10.3 per cent, one of the highest quarterly growth in the last 10 years. Industrial growth was much lower at around 7 per cent for the same period of pervious year.

  Manufacturing output for June surged 12.5 per cent as compared to 8.1 per cent during the previous year. The growth in electricity generation at 9.4 per cent and mining at 5.8 per cent came as a pleasant surprise, after showing weakness during the months of March and April.

  The manufacturing growth came mainly from a 23.7 per cent growth in consumer goods and 10.8 per cent growth in the capital goods sector. The strong growth in the capital goods sector indicates sustained up trend in industrial investments.

  After the strong growth in industrial output for the first quarter, it is reasonably safe to expect a full ear growth exceeding 8 per cent for the sector. If services can maintain the above 8 per cent growth and farm sector can chip in with 3-4 per cent, aggregate GDP growth for the full year would exceed 7 per cent.

• CMIE has raised its full year economic forecast for the current financial year to 6.8 per cent from the earlier 6 per cent. The institution had lowered its forecast in the first week of June after the delay in arrival of monsoons. The upward revision is on expectations of a better performance from the agriculture sector, which is now projected to grow at 3 per cent as against the earlier forecast of 0.7 per cent.

  CMIE expects industrial growth for the year 2005-06 to be at 7.65 per cent, higher from the earlier forecast of 7.5 per cent. Its forecast for manufacturing sector growth has also been increased from 8 per cent to 8.2 per cent.

• Inflation has dropped below the 4-per cent mark for the week ended 30 July. The WPI inflation declined to 3.84 per cent from 4.07 per cent for the previous week. The rate of inflation during the same week of previous year was above 8 per cent. The decline was attributed to a fall in prices of food articles and manufactured goods.

Industry update

• Growth in telecom subscribers for the month of July was highly encouraging. Monthly growth in mobile subscriptions at close to 2.5 million was much higher than the first three months of the current financial year. The additions have come in from smaller towns and low-profile circles as companies expand their network.

  Further growth would be significantly higher if call rates drop further. The recent recommendations of TRAI to reduce the ADC levy would help in reducing the call rates further. Though the PSU telecom companies are resisting the move to reduce the ADC, the recommendations are expected to go through as the telecom ministry is said to be in favour of the move.

  The telecom ministry's proposal to bring in standard call rates within the country would also boost penetration and usage. The proposed plan would bring down STD calls substantially, by ensuring same charges for calls to anywhere within the country.

  Mobile handset costs are also coming down with better technology. A US company has reportedly announced a new manufacturing process which would lower the handset costs to as low as Rs1,000. With global handset manufacturers setting up local production facilities, equipment costs will come down further. This will aid the spread of mobile telephony in under penetrated rural areas.

  The telecom companies are also trying to revive growth in the fixed line segment by offer value added services and broadband internet. Broadband could well be the next growth area for the telecom sector as bandwidth prices have declined making internet access affordable to more and more consumers.

• Reports that the Left-controlled trade unions are trying to spread their influence in the newly industrialised areas like Gurgaon in Haryana are disturbing. After destroying the industrial climate and hence economic growth of states like West Bengal and Kerala, these trade unionists are trying to build their base in new geographical areas.

  So far, it is the automobile industry, which is bearing the brunt of the new militant labour activism. Enthused by their perceived success at Honda Motorcycles, these parties have now set their eyes on Maruti. They have revived a 5-year-old dispute and are reportedly trying to involve the prime minister, as well.

  These troubles are coming at the worst possible time for the auto industry. Domestic sales growth has declined and the industry is trying to expand its export sales. Many companies like Tata Motors, Hyundai and the two-wheeler manufacturers have increased their export sales significantly in the first quarter.

  If the industry is disturbed by labour unrest, the country would be losing out on a significant opportunity to emerge as a production base for smaller cars and two-wheelers. Already there is stiff competition from countries in Eastern Europe and China to attract investments in the auto sector. The government would hopefully take the necessary steps to rein in these unions.

US markets, economy and oil

• US markets opened weak on Monday as high crude prices and uncertainty over the interest rate and economic outlook by the US Fed kept traders on tenterhooks. US markets rallied on Tuesday as the rate hike was on expected lines and oil prices declined marginally.

  By Wednesday crude prices surged again which negated all the positive sentiments from the stable outlook from the Fed. High crude prices had a positive impact on Thursday as the rally in oil stocks helped the US indices to close higher.

• The US Fed raised short-term interest rate by 25 basis points to 3.5 per cent as expected for the 10th straight time. The Fed said it would maintain its policy of increasing the benchmark interest rate at a 'measured' pace. The US central bank maintained that economic growth continued to by buoyant and core inflation remains low.

  The US economy is expected to grow at 4.1 per cent during the third quarter ending September and at a faster 5 per cent during the fourth quarter. The growth is being fuelled by rapidly expanding consumer credit and home mortgages, which put more cash in the hands of the consumers.

  With the continued strength in US job growth, incomes and consumer spending, most analysts expect the Fed to increase rates by another 50 basis points to 4 per cent by year-end and further to 4.5 per cent or even 5 per cent by the middle of next year. These forecasts are on expectations that inflation would remain at the current levels. Any upward pressure on inflation may force the Fed to increase the interest rate at a faster rate.

• The Japanese economy expanded by 1.1 per cent on an annualised basis for the second quarter ended June. Annualised growth for the first six months of the calendar year is at 3.3 per cent, aided by strong consumer spending which was in turn supported by increase in wages.

  Japan had faced an economic downturn last year and the expansion for two consecutive quarters this year has raised hopes that the recovery would be sustainable. The country's economy has been in recession for almost half the period since 1991.

  An economic recovery in Japan has broad implications for the global economy and the Indian stock markets in particular. Growth in the world's second largest economy would cushion any decline in other parts of the world like US or China, especially since the latest Japanese recovery is led by domestic consumption. This would ensure that global economic growth would remain steady even if growth rates in US or China were to slow down.

  Japanese investors have recently become attracted in the Indian stock markets and India dedicated funds in Japan have seen huge subscriptions. Better growth in Japan may lead to higher savings, which may find their way to emerging markets like India. On the flip side, higher growth may lead to higher interest rates in Japan making domestic investments more attractive than they are now. However, this may not happen anytime soon as price levels continue to fall or in other words the Japanese economy is still experiencing deflationary conditions.

• Crude oil futures continued to set new lifetime records for near month contracts during the week. The NYMEX contracts for September delivery rose to as high as $66.11 per barrel on Thursday, before closing at $65.8 for the day on yet another new lifetime closing high. An unexpected drop in weekly US crude inventory data and continued production outages in many US refineries put pressure on crude prices throughout the week.

  US gasoline or petrol inventories were lower by 2.1-million barrels as per the weekly data. Together with reports of pipeline fires and refinery outages, this sent gasoline prices to all time highs, which in turn pushed up crude prices.

  The International Energy Agency (IEA) maintained its fourth quarter crude demand at 85.9 million barrels a day. The agency has forecast lower output from Russia, which would put additional pressure on the OPEC countries to meet the shortfall. Most OPEC producers are already pumping crude at their peak capacity and the only country having some excess capacity is Saudi Arabia.

  On the demand side, the IEA said Chinese consumption for the month of June actually declined by 1.3 per cent as compared to the previous year. This news was almost ignored by the markets, as consumption remains robust in the US.
  

*Disclaimer: The author doesn't have any position in the stocks specifically 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.

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List of general reports on finance