Markets opened the week on an uncertain note as crude oil touched $70 for the first time ever on Monday. Record crude prices led the frontline indices to extend previous week's losses and close lower. Ironically, high crude pries led to a recovery and smart gains for the markets on Tuesday.

Declining investment flows and higher oil import bill have been keeping the rupee under pressure for the last few weeks. By Tuesday, the rupee gave in and broke through the Rs44-to-a-dollar mark to a recent low. This led to all round buying in frontline technology stocks and lifted the markets.

Buying in technology stocks continued on Wednesday as well and kept the indices on an uptrend. Reports of a large order from ABN Amro to TCS and Infosys kept the interest in technology alive.

On Friday, the finance minister decided to help the markets and indicated a possible reduction in excise duty for the auto sector in the next budget. The government also decided to sell an 8-per cent stake in Maruti to domestic institutions. Led by the auto majors, the sensex managed to close the week at 7900. The Nifty closed well above 2400.

The Sensex gained over 266 points or close to 3.5 per cent during the week and the Nifty added 78 points or well over 3 per cent over the week.

Mid-caps tracked the movements in frontline stocks during the week. After closing lower on Monday, the mid-cap index posted strong gains for the rest of the week. The weekly gains on the CNX Mid-Cap 100 index were also similar to the frontline indices. The index added 120 points during the week or well over 3 per cent.

Domestic economic and regulatory action

• The RBI has maintained its full year GDP growth forecast at 7 per cent despite the significant rise in oil prices. The central bank has also kept the year-end inflation target of between 5 and 5.5 per cent unchanged.

  The central bank is very optimistic on the domestic economic outlook and does not expect the economy to be affected by global uncertainties. The report points to robust growth in the manufacturing and services sector during the first quarter to support its view. Healthy monsoons are expected to aid a recovery in farm sector growth as well.

  The RBI has accepted that global uncertainties has increased considerably on account of higher fuel costs and wants the government to pass on the higher prices to consumers to ease the pressure on the fiscal situation. The central bank has also warned the government that it would be difficult to wipe out revenue deficit by the year 2008-09 as targeted unless tax compliance improves dramatically.

• Despite the bull run and lifetime highs for the stock indices, stock market- related investments continue to be the least preferred investment option for most Indians. According to the latest RBI report, only 1.1 per cent of the gross household savings was invested in shares and debentures excluding mutual funds during 2004-05. Mutual funds attracted a miniscule 0.4 per cent of savings during this period.

  The bulk of the household savings continue to go into bank deposits and government sponsored small savings schemes. Bank deposits, excluding cooperative banks, attracted 37 per cent of gross savings while small savings accounted for 19 per cent.

• Wholesale price inflation for the week ended 20 August declined to 3.08 per cent from 3.13 per cent for the previous week. The decline was on account of lower prices of food articles and chemicals as well as the high base effect of last year. Inflation was well above eight per cent during the same week of previous year.

Industry update

• The passenger car industry heard something very pleasing from the finance minister during the week. Addressing an industry body, the minister said duties and taxes on small cars would be reduced to make India a global hub of small car manufacturing.

  Reduction in duties is a long-standing demand of the automobile industry. Government levies on automobiles in India are among the highest in the world — a legacy of our socialist past when personal vehicles were considered luxuries. We have come a long way from those days and the country is one of the fastest growing automobile markets in the world. Passenger car sales are expected to touch two million per year within the next five years.

  More importantly, India has a significant opportunity to emerge as a global manufacturing hub for small cars. The country already boasts of considerable engineering and design skills, which would strengthen the industry.

  However, to be globally competitive in a high-volume business like small cars the industry needs a large base in the domestic market. This is where the proposed reduction in duties would help, by making cars more affordable and hence expanding the base. A large domestic market would attract more investment in technology and manufacturing facilities.

• Foreign exchange earnings from the tourism sector were over $5 billion during the last financial year, a 20 per cent increase from the previous year. More than 3.5 million foreign tourists visited the country during 2004-05. These numbers sound very impressive in isolation but look pathetic when compared to even smaller countries like Singapore and Malaysia.

  After announcing a number of initiatives in the beginning, the tourism minister has virtually disappeared from the public eye following a couple of controversies. Nothing has been heard about the programmes, including imparting lessons in good behaviour to taxi drivers, announced with much fanfare.

  For the tourism sector to achieve faster growth, a more comprehensive approach is required. The most important requirement is international air connectivity. Hopefully, the Delhi and Mumbai airport development programmes would go through and the situation would improve over the next few years. New airports at Hyderabad and Bangalore would also add to the facilities.

  The hospitality industry is fully capable of building enough hotel rooms to cater to future demand. Domestic players like the Taj and Oberoi groups are already well known internationally. Most international hotel chains are present in the country and all of them have announced large expansion plans.

  For the tourism sector, opportunities offered by domestic tourism could be more significant. Increasing income levels have led to a surge in Indians travelling abroad on holidays in recent years. Chances are that most of these travellers may not have seen much of their own country. High domestic airfare and lack of affordable facilities have held back the growth in this sector.

  There are enough signs that the situation is changing rapidly. Domestic tourist inflows into well-organised and marketed destinations like Kerala have increased dramatically. Domestic airfares have come down drastically with increasing competition and air travel is now well within the reach of an average middle class consumer. A number of hospitality companies, including the Taj group, have announced aggressive plans to set up budget hotels across the country.

• One of the most significant factors behind the record crude oil prices is the shortage of refining capacity across the globe. Most of the refineries in the west process only light crude, which is easy to refine. The declining availability of light crude and high prices will make the world more and more dependent on heavier crude in future. Most of the recent oil finds are all heavy crude and oil experts believe that most of the light crude reserves have already been discovered.

  Indian oil refining companies have a potentially huge opportunity to emerge as major players globally. Petroleum products are already the second largest item in our export basket after gems and jewellery. The new refineries that have come up in the country are flexible enough to process any type of crude. Reliance Industries have become a significant exporter of refined petroleum products over the last few years, as its Jamnagar refinery is one of the most flexible and efficient in the world.

  The country has a total refining capacity of around 125-million tonnes per annum at present. Most of the PSU oil companies have announced significant investments in refining. Indian Oil, BPCL and HPCL are all looking at coast-based refineries with an eye on the export market. ONGC is planning a refinery in Rajasthan besides expanding capacity at MRPL. Among the private sector players, Reliance is planning to double capacity at Jamnagar to 60- million tonnes per annum and Essar is expected to commission its 12-million tonnes facility by next year.

  With all these additions, total refining capacity is expected to exceed 200- million tonnes in the next five years. Domestic demand for refined products is expected to rise to 140-million tonnes from 110-million tonnes per annum at present. That leaves around 60-million tonnes of capacity to service the export markets. Our strategic location between the oil producers in the Middle East and the fast growing consumers in East Asia could add to our strengths.

US markets, economy and oil

• US markets had a week of gains despite the damage caused by Hurricane Katrina on its second visit to US coast early this week. Record oil prices helped the energy stocks post significant gains providing strong support to the markets. Expectations that the Fed would stop increasing short term interest rates to help the economy recover from hurricane damage also led to gains in stock prices.

  The Dow gained half-a-per cent for the week while the NASDAQ and S&P 500 gained a per cent each.

• Analysts expect the US economic growth rate to be lower by at least half-a-per cent as a result of the hurricane damage. The destruction caused is very widespread and many believe that it may even take years for the affected regions to fully recover. Total economic impact of the hurricane is estimated to be around $100 billion. Whether the disaster could have any longer term impact on the US economy, like triggering a decline in asset prices, remains to be seen.

  The US Fed may stop raising short-term interest rates to help the economy recover from the hurricane destruction. Most analysts now believe that the Fed would increase the rate maybe one last time at its next meeting and would adopt a more expansionary policy from thereon.

  The US economy continues to be in good health, which may help absorb the impact of the hurricane without much pain. New job additions for the month of August was higher than expected which helped push the unemployment rate to a four-year low. While job creation in the services sector remained robust, manufacturing sector actually shed jobs during August.

  Most economists have reduced the US growth forecast for the third quarter ending September to between 3.5 and 3.8 per cent from the earlier projection of 4.5 per cent. However, economic growth for the October-December quarter is expected to be well above 4 per cent as reconstruction work picks up.

• Crude oil futures hit new lifetime high of $70.85 per barrel on the NYMEX as Hurricane Katrina caused widespread damage to oil production facilities in the Gulf of Mexico and led to refinery shut downs. The commodity declined towards the end of the week as some of the facilities resumed operations after the storm passed.

  Oil prices declined on Friday as the International Energy Agency announced that it has started emergency fuel supplies to the US to ease shortages. The IEA would release up to 2-million barrels a day over the next 30 days. There are also indications that the US government may release crude from its strategic reserves to further ease the situation. Oil futures for October delivery closed the week at $67.57 to a barrel, gaining 2 per cent over the week.

*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.

Other articles by Rex Mathew

List of general reports on markets

List of general reports on finance