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Markets belie events

May 19, 2001

The markets have made small but steady gains since the beginning of May. The rising mercury seems to have taken the market barometer along with it. This is the third consecutive weekly gain on the bourses and the Sensex has risen 14.8% over the past five weeks. In the current week the BSE Sensex and the Nifty Fifty closed higher by 2.7% and 2.8% respectively. Mirroring similar cautious optimism the U.S indices, Dow Jones and Nasdaq, rose by 3.4% and 3.6% respectively over the week. The U.S bourses received a mid-week shot in the arm with the Federal Reserve (Fed) cutting interest rates by another 50 basis points. The Fed, at its scheduled Federal Open Market Committee (FOMC) meeting, announced the fifth rate cut in 2001 taking the aggregate cut to two and a half percentage points. Although the markets reacted positively, but with a lag, there seems to be some concerns, as the aggressive moves by the Fed could also be an ominous sign for the economy.

The domestic markets had their fair share of news & events to keep the bourses busy. The Reserve Bank of India (RBI), beating the Fed, announced 50 basis points cut in cash reserve ratio (CRR) last Saturday. However, the Central Bank has left the bank rate -- rate at which commercial banks borrow from RBI -- untouched. Yields in the debt market are indicating that this cut could be around the corner. The CRR has been brought down to 7.5%. This is the second CRR cut by the RBI in 2001 bringing down the CRR from 8.5% to the current level. Earlier, on March 1, the Central Bank had cut only the bank rate by half a percentage point. The expansionary policy is to provide much needed impetus to economic activity, which has slowed down over 3Q and 4Q of FY01, consequently, leading to a pick-up in credit growth.

Securities & Exchange Board of India (SEBI), which deferred the decision on deferral products to May 14, has announced the interdiction of forward trading mechanisms. Forward positions, prior to May 15, have to be squared off by September 2, 2001. While positions taken on or after May 15 have to be closed by July 2, 2001. After the announcement, contrary to popular opinion, the markets, although opening lower, closed the day in positive territory. This could indicate that the collective thinking in the markets considered the move a step in the right direction. However, a point to note is that the mutual funds have been net sellers, the retail investor is on the sidelines as trading volumes are low and momentum investors maybe subdued as ringleaders face interrogation. Consequently, the weightage of FIIs in the markets could have increased. This category of investors is reported to be favourable towards the SEBI judgment. Therefore, the rise may not be a true indicator of the holistic sentiment.

The Meteorological Department, in the latter half of the week, reported that the rain gods are appeased (collectively as a nation we seem to be doing more good than bad; surprising?) and will shower us with their blessings. The monsoon is expected to be normal and timely. This did add a reason to cheer for the markets. The final report indicating the timing, nature and distribution is expected on May 25. Till then be good and cross your fingers that others follow suit.

Volumes in the market continue to remain low, as confidence among participants, primarily retail, is weak. The lack of any trigger may lead to markets continuing with their lateral movements. The fear regarding the current rally is that it could be an artificial rise to facilitate the exit of more sophisticated players.

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