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World markets decline, India follows

Sep 26, 2009

After stellar gains for the last two consecutive weeks (of 3.7% and 2.9%), the Indian markets lost some steam this week, logging in a loss of 0.3% for the week. But this comes in the backdrop of much higher declines in almost all other major indices around the world. The benchmark BSE-Sensex hit a 16 month high on Tuesday, but subsequently lost the momentum to finally close the week on a marginally negative note. The Indian markets were under pressure from the weak cues emanating from the global markets. China led the list of losers with a loss of 4.2% for the week. This was followed Hong Kong and France which lost 2.8% and 2.3% respectively. US markets declined by 1.6% for the week. All this comes in the midst of a slump in crude and gold prices, which headed southward during the week. Crude oil closed lower by over 8% while gold lost 1.6%.

Source: Yahoo Finance

Coming to the performance of sectoral indices in India, the various indices had their fair share of both losers and gainers. The pack of gainers was led by pharma stocks, with the BSE-Healthcare Index ending higher by about 7.6%. The pharma stocks were followed in their gains by stocks forming part of the realty and FMCG sectors. Amongst the losers during the week were the BSE-Metal and BSE-IT which ended lower within a range of 3% to 3.5%. This is almost the opposite of last week, when the metal and IT spaces had performed well, and the pharma and FMCG sectors had seen comparatively much lower gains.

Source: BSE

In the corporate news during the week, as per reports commercial vehicle (CV) makers such as Tata Motors and Ashok Leyland are planning to raise prices of their CVs. This may happen in the month of October itself. The hike in prices is expected to be in the range of 1% to 3%, which in value terms would be about Rs 9,000 to Rs 15,000 per vehicle. This comes on the back of a rise in the price of steel to the tune of about 12% in the last three months. With the recent pickup in demand for commercial vehicles, this might just be the right time for these companies to raise prices without affecting demand significantly.

Fifteen months after Tata Motors acquired Jaguar Land Rover (JLR), the company is restructuring its UK manufacturing facilities in a bid to cut costs and improve its financial health. Tata Motors decided to close down either its Castle Bromwich facility or its plant in Solihull in West Midlands. This will not happen immediately but over a period of 5 years. The aim is to consolidate the entire production in West Midlands at one site.

With sugar prices going through the roof, biscuit manufacturers are having a tough time. The Indian Biscuits Manufacturer's Association (IBMA) has appealed to the government to bring down the prices of wheat, sugar, edible oil and milk powder - the key ingredients for biscuit manufacturing. It may be noted that the biscuit industry is worth Rs 60 bn and 50% of the market belongs to small scale industries. Further, the industry being labour-intensive, the poor margins have led to significant job losses. The decline in the share price of Britannia by 18% during the past two months is a reflection of these concerns.

The RBI sounded a note of caution during the week. It has once again warned banks on their real estate exposure, particularly to builders and developers. The move comes at a time when activity in the real estate space is picking up with builders launching new projects. In a circular issued during the week, the regulator has asked banks to assess financial viability of a group with interests in the real estate space and not just on a company given the presence of subsidiaries, related parties and special purpose vehicles through which they operate. The RBI thus wants to leave no stone unturned to ensure that Indian banks remain free of subprime exposures.

Movers and shakers during the week
Company 18-Sep-09 25-Sep-09 Change 52-wk High/Low
Top gainers during the week (BSE-A Group)
UCO Bank 46 55 19.3% 58/22
Dr. Reddy's 865 986 13.9% 1001/357
Ranbaxy 360 410 13.7% 415/133
Zee Entertainment 209 236 13.0% 237/88
Central Bank 124 138 11.1% 144/30
Top losers during the week (BSE-A Group)
Hindalco 138 127 -8.0% 140/37
Sesa Goa 278 257 -7.7% 285/60
Tulip Telecom 1,034 955 -7.6% 1,250/258
Jaiprakash Asso. 257 237 -7.6% 259/47
Jubilant Organosys 241 223 -7.3% 322/85
Source: Equitymaster

Another important event during the week was the World Bank approving loans worth US$ 4.3 bn to India to help the latter build infrastructure and shore up the capital of some state banks as the economy recovers from the global financial crisis. These loans are part of the World Bank's US$ 14 bn in crisis-related lending for Asia's third-largest economy over three years through 2012. In our opinion, while the funding will certainly bolster India's plans of infrastructure development, as always execution will be the key challenge given the country's record of delaying projects in the past which have resulted in cost overruns.

In the past, the RBI always tended to intervene in the currency markets to stem the appreciation of the rupee so that exporters did not feel the pinch. But this time around it may end up following a different course of action. As reported on Bloomberg, India's central bank will allow the rupee to strengthen in order to reduce the cost of imports and curb inflation without raising borrowing costs. India has already been impacted hard by the deficient monsoons this season just when the economy was showing signs of limping back to normalcy after the slowdown in growth last year. But since poor rainfall has hampered crop production, concerns of rising inflation have been looming large and the RBI may adopt the Indian currency as one of the tools to rein in inflation. Thus, a rise in the value of the rupee would make the import of crude and sugar that much cheaper. Already the Wholesale Price Index (WPI) has entered the positive zone and there are expectations of the same soaring to 6% by the end of the year.

Despite that, the RBI may not increase interest rates anytime soon given that India's GDP growth has already taken a slight beating due to poor monsoons. In such a scenario, exporters of course could feel the heat as they have already been battered by the recession in the US and Europe and an appreciating rupee will only add on to their cup of woes. But this time around concerns of inflation rearing its ugly head means that their problems may not get precedence.

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Dec 8, 2021 11:43 AM