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Markets: Fed push and pull!

Aug 12, 2006

Indian equities could not have got it better! On a week-on-week basis, the benchmark indices (BSE-Sensex and NSE-Nifty), gained by 3% each. While a large part of the gains were fueled by the US Fed's decision to pause interest rate hikes, considering weak economic data and stable inflation, another factor that seemingly worked in the favour of the Indian markets was the strong performance raked in by India Inc during the June quarter of this fiscal. The markets opened the week on a sullen note due to apprehensions about the Fed's imminent decision with respect to rate hikes. After seventeen successive 25 basis points interest rate hikes in the past 26 months (since June 2004), the US Federal Reserve finally paused its campaign. However, in the same breath, it also indicated that further rate hikes might be on the anvil, if 'need' be!

Following the announcement, and in line with most of its global counterparts (except the US market, which closed weak on the back of future rate hike worries!), Indian indices closed on a buoyant note on Wednesday, with the BSE Sensex gaining by over 1% to close at its highest level since May 18, 2006. Most Asian markets were also positive on Wednesday, with the Japanese Nikkei ending higher by 2.2%.

Following this, however, on Thursday, a bit of volatility was witnessed, as Asian shares fell after the Bank of Korea raised interest rates by a quarter of a percentage point to a five-year high of 4.5%. Beside this, the news of a terrorist plot to blow up several aircrafts in flight between the UK and the US also raised fears. The fear of this terrorist strike also led to a sharp decline (US$ 2 per barrel) in crude oil prices. However, taking all this in its stride, like they have done in the past, the markets rose again on Friday, finally closing the week with gains of around 3%.

Net investments - FIIs Vs MFs
(Rs m) FIIs MFs Total
4-Aug-06(470) 776 306
7-Aug-061,159 994 2,153
8-Aug-062,985 (1,265)1,720
9-Aug-062,504 1,981 4,485
10-Aug-061,519 225 1,744
Total7,697 2,711 10,408

As far as the institutional activity on the bourses was concerned, as compared to last week, Foreign Institutional Investors (FIIs) were net buyers this week to the tune of Rs 7.7 bn. Domestic mutual funds (MFs) also turned out to be net buyers (Rs 2.7 bn). The total net FII inflow for this calendar year has now touched the US$ 3.2 bn mark.

Having looked the institutional activity in the last week, let us now consider some sector/stock specific developments.

  • Banking stocks closed strong this week. Major gainers included Indusind Bank (16%), Bank of Rajasthan (15%) and Yes Bank (12%). UTI Bank closed with 4% week-on-week gains. This was seemingly on the back of reports that the private sector bank has become the first Indian banking entity to raise US$ 150 m (about Rs 6.9 bn) in hybrid capital from the international market to shore up its capital base to make provisions as per Basel-II requirements. The bank mobilised US$ 150 m through 15-year subordinated Upper Tier-II bonds. The bonds carry a fixed rate of interest of 7.25% (around 2.3% higher than the 10-year US treasury). It can be recalled that the RBI had recently allowed Indian banks to raise hybrid capital (Tier-I and Tier-II) in foreign currency to meet the Basel-II norms, which mandate banks to make provisioning for market and operational risks from March 2007, besides supporting expansion of the balance sheet. The hybrid capital, thus, raised overseas by UTI Bank, not only improves its CAR position but also hedges its net interest margins, as the funds are at a relatively lower cost than domestic funds. Other Banking Stocks.

    Top gainers during the week (BSE-A)
    CompanyPrice on
    Aug 04 (Rs)
    Price on
    Aug 11 (Rs)
    H/L (Rs)
    BSE-SENSEX 10,86711,1923.0%12671 / 7538
    S&P CNX NIFTY 3,1773,2743.1%3287 / 3237
    ROLTA INDIA16821025.3%285 / 120
    RAMCO SYSTEMS16820421.3%547 / 142
    TITAN INDUSTRIES62375220.7%895 / 391
    CMC LIMITED41950420.3%645 / 335
    THOMAS COOK INDIA48557718.9%829 / 411

  • Domestic pharma major Ranbaxy received tentative approval from the US FDA to manufacture and market 'Risperidone' (brand name: 'Risperdal') Oral Solution, 1 mg/ml in the US generics market. This drug is indicated for the treatment of schizophrenia and the total annual market sales were pegged at US$66 m (IMS - MAT: March 2006). Ranbaxy will launch the drug in the US market on receiving the final approval. This news came as a positive for the company, as increased product launches will enable it to tide over the competitive pricing environment witnessed in the US generics market. The stock, however, closed the week with marginal losses. Other Pharma stocks

    Top losers during the week (BSE-A)
    CompanyPrice on
    Aug 04 (Rs)
    Price on
    Aug 11 (Rs)
    H/L (Rs)
    KOCHI REF125122-2.8%126 / 121
    BPCL309305-1.0%312 / 304
    RANBAXY397394-0.7%405 / 393
    STERL BIOTECH110109-0.5%110 / 108
    GTL LIMITED139 139 -0.3%142 / 138

  • Hero Honda has chalked out plans to set up a plant in the Haridwar industrial unit. The plant will be used for the manufacture of two-wheelers and will involve an investment of Rs 20 bn. It must be noted that Hero Honda is the largest manufacturer of motorcycles in the world and is solely engaged in the manufacture and sale of motorcycles. The company has a commanding 48% market share in the motorcycle segment. India is home to one of the youngest population in the world and is also the one with one of the lowest two-wheeler penetration levels. This has given a boost to the domestic two-wheeler industry in the past few years where double-digit growth rates in motorcycles have become the norm rather than the exception. This favourable trend has also boosted Hero Honda's performance. The stock was up 1% week-on-week. Other Auto stocks.

Now that the June quarter results season have come to an end, stock markets have started focusing on global factors, which include the developments in West Asia and its impact on crude prices. This week also saw the Fed leaving the investor community in another wait for the next Fed meeting (due on September 20) to know the US central bank's stance on interest rates. As far as the Indian economy is concerned, we continue to believe that interest rates in India will go up further over the course of this fiscal. In this backdrop, we suggest investors to practice caution while selecting sectors/stocks for the long-term.

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