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Policy reaction - Views on News from Equitymaster
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  • May 29, 2004

    Policy reaction

    It was a week dominated by first, the political drama at the Centre, which kept the markets on their feet, followed by the uncertainty pertaining to poilicy announcements, which kept the markets on their toes. Finally the markets lost their balance amidst concerns with respect to the pace of reforms and economic growth owing to no favourable surprises in the Common Minimum Program (CMP). The indices, once again, ended in the red this week with the BSE-Sensex and the NSE-Nifty losing 2.5% and 3.3% respectively. With this, notwithstanding the small gains witnessed in the first week of May, the indices have shed nearly 20% in the last 5 weeks.

    Key sectoral losers over the last one month
    COMPANY Price on April 28 (Rs) Price on May 28 (Rs) % CHANGE
    BSE-SENSEX 5,713 4,835 -15.4%
    TATA POWER 385 275 -28.6%
    RELIANCE ENERGY 750 498 -33.6%
    NEYVELI LIGNITE 61 43 -30.8%
    OBC 331 221 -33.1%
    PNB 386 261 -32.3%
    SBI 639 485 -24.2%
    UTI BANK 154 118 -23.0%
    HPCL 474 314 -33.8%
    BPCL 463 327 -29.3%
    NALCO 189 126 -33.1%
    SCI 133 90 -32.4%
    MTNL 145 112 -22.9%

    The week began on a strong note as market participants were enthused by the appointment of Mr. Chidambaram as the finance minister, who on assuming office re-iterated the government's commitment towards fiscal responsibility and the continuation of reforms. However, external concerns, in particular related to the strong crude oil prices and its effect on the pace of economic growth across economies, took its toll on global markets on Tuesday. The ripple effect of this was also witnessed on the Indian stock markets, albeit they did manage some recovery in the second half of trade. Wednesday saw the indices open in the positive again, only to fall back into the red, as investors turned cautious with the CMP due to be released the following day. The derivatives settlement could also have played its role in aiding the volatility on the bourses during the week.

    Key gainers over the week (NSE-50)
    COMPANY Price on
    May 21 (Rs)
    Price on
    May 28 (Rs)
    H/L (Rs)
    BSE-SENSEX 4,962 4,835 -2.5% 6,250 / 3,086
    S&P CNX NIFTY 1,560 1,509 -3.3% 2,015 / 978
    ZEE TELE 118 128 8.5% 175 / 79
    VSNL 128 132 3.2% 210 / 84
    INFOSYS 4,910 5,058 3.0% 6,100 / 2,636
    SUN PHARMA 365 375 2.9% 419 / 142
    DR.REDDY 866 888 2.5% 1,471 / 675

    While Thursday's trade remained largely lacklustre as the indices remained range bound, Friday saw the real action in terms of a preliminary reaction to the CMP announced by the United Progressive Alliance (UPA), which was released the previous day after market hours. While there was nothing new in the CMP, there was nothing that it provided for the markets to cheer. In fact, the CMP put paid to some reform measures that were initiated by the previous government. Some of the important issues relate to disinvestment of profit-making PSUs, changes in labour laws, banking sector consolidation and privatisation of power utilities through a review of the Electricity Act of 2003, which have indicated a set back for reforms. All this re-affirmed the FII community's skepticism about the India story going forward as concerns related to the pace of reforms, the country's fiscal position and economic growth surfaced.

    Key losers over the week (NSE-50)
    COMPANY Price on
    May 21 (Rs)
    Price on
    May 28 (Rs)
    H/L (Rs)
    MARUTI 463 405 -12.4% 156 / 602
    MTNL 126 112 -11.6% 166 / 92
    GAIL 170 153 -9.8% 312 / 94
    ICICI BANK 267 246 -7.9% 352 / 133
    TATA MOTORS 420 387 -7.9% 570 / 163

    It must be noted that ever since the dethroning of the NDA government became certain in early May, Foreign Institutional Investors (FIIs) changed their stance and have consistently pulled out money from the Indian markets. After pumping in over US$ 6 bn in 2003 topped with another nearly US$ 4 bn in the first 4 months of 2004, the month of May has witnessed an outflow of nearly US$ 750 m. This has had a profound effect on Indian stock markets with the indices crashing over 15% in the month of May alone (over 20% in the last 5 weeks). This change in the FII perspective could be attributed to the concerns with respect to the authorities managing India, as politics continues to enjoy the top slot in the top-down approachto investing. However, we continue to believe that a clear and definitive direction would be arrived at only after the Budget is presented sometime next month, as most of the statements in the CMP are too broad based to arrive at a conclusion.



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