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A stimulating week

Jan 3, 2009

The week gone by saw several attempts by policymakers the world over to make sure that 2009 turns out to be not as bad as has been predicted. In India, it was no different. The Reserve Bank of India (RBI), during the week, continued with its endeavour of lowering the cost of funds, using its tools of monetary policy for easing interest rates and providing more liquidity to productive sectors. It reduced the repo rate from 6.5% to 5.5%, reverse repo rate from 5.0% to 4.0% and cash reserve ratio from 5.5% to 5.0%. But the fact remains that the central bank has barely managed to convince bankers to pass on the rate cuts to customers in the recent past. How the banks will reciprocate to these further cut in rates remains to be seen.The RBI seems to be worried about the official recognition of recession in the developed economies of the US, UK, Euro area and Japan. The heightened downside risk to the global economy is what concerns it. Along with this, the policy initiatives in the advanced economies geared towards managing the potentially deflationary trends, particularly the US Fed's move of bring interest rates to near–zero seems to have influenced the RBI decision to loosen its fists. Going forward, the further reduction in CRR is expected to inject additional liquidity to the tune of Rs 200 bn.

In a final attempt to revive the economy, before the general elections, the government has offered a booster dose by way of a second stimulus package to the ailing sectors. The package will offer a combination of easy access to credit as well as fiscal relief to export oriented businesses, cement and commercial vehicle industries that are essential to pump prime the economy. It may also be noted that the fiscal incentives announced so far will continue only until till a new government gets an opportunity to present a full budget after the general elections. The tax cuts announced in the second stimulus package would entail loss of tax revenue to the tune of Rs 400 bn in addition to the cost of the first package of Rs 310 bn. The Planning Commission believes that this would take the country's fiscal deficit to the range of 5.5% to 6% in the current financial year, nearly 2.5% higher than budgeted.

Policy makers in the US too are busy scratching their head over formulating their own stimulus package. One that will help re-ignite their economy in the best possible way. Struck with a patriotic streak, Obama's advisers are now toying with the idea of including a "buy American" provision in the economic stimulus legislation that the new administration will shortly be looking to implement. With such a proposal, they are hoping to save or create 3 million American jobs. The package is expected to provide tax cuts and spending on infrastructure like roads, bridges and transit systems.

Crude oil rose about 22% during the week as the conflict in Gaza Strip increased concerns that Middle East supplies would be cut. Incidentally this is the largest weekly gain that oil has seen since 1986. The prospects of distress in the region rose as Israeli warplanes conducted fresh attacks against Hamas on the seventh day of a bombing campaign in the Gaza Strip. The region is the source of about one-third of the world's oil. This unnerving geopolitical news has been one of the biggest factors contributing to the wild swings in crude prices. Gold rose a meager 0.7% for the week as the dollar climbed against the euro reducing the metal's attractiveness.

Source: Yahoo FinanceSource: Yahoo Finance

Source: SEBISource: BSE

Source: BSESource: BSE

Movers and shakers during the week
Company26-Dec-082-Jan-09Change52-wk High/LowChange from 52-wk High
Top gainers during the week (BSE-A Group)
India Infoline43 68 57.8%388 / 34-82.5%
Satyam136 178 31.0%544 115 -67.4%
GMDC39 50 30.1%261 / 25-80.7%
Unitech36 46 28.5%547 / 22-91.5%
Godrej Industries66 84 27.7%499 / 46-83.2%
Top losers during the week (BSE-A Group)
Phoenix Mill 80 75 -6.6%507 / 48-85.2%
Indiabulls Fin. Serv.144 138 -3.8%985 / 78-86.0%
REI Agro Ltd.708 682 -3.7%1,795 / 355-62.0%
MMTC Ltd.20,823 20,146 -3.2%41,307 / 9,125-51.2%
BPCL375 364 -2.9%560 / 206-35.1%
Source: Equitymaster

The enthusiasm of governments of various countries to ensure the revival of their economies had a positive effect on indices the world over. The benchmark indices in the US and UK rose 6.7% and 8.2% respectively. Asian markets too posted strong gains with the key indices in Hong Kong and Singapore posting strong gains. The BSE-Sensex ended the week with a healthy gain of 4.1% lead by strength in the metal and realty sectors.

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