The Hindu : Bulls regain control

Online edition of India's National Newspaper
Monday, Jan 26, 2004

Business

Business

Bulls regain control

THE MUCH-EXPECTED correction at last took place in the stock markets last week, though with a high degree of volatility. Bear operators, who had earlier ignored the better than expected corporate numbers, came forth to dominate the markets. They hammered down stocks from all sectors aided by various rumours — particularly one relating to a ban on participatory notes. These are derivative instruments issued against underlying Indian securities to overseas investors. Some foreign entities, which are not registered with the Securities and Exchange Board of India, use the participatory note route to invest indirectly in the secondary markets. Hedge funds, for instance, are not allowed to deal directly in the local markets and they usually invest through instruments such as participatory notes issued by foreign institutional investors registered with the SEBI.

Combined with a slowdown in FII buying and massive selling by local institutions, the effect of panic on the market sentiment was dramatic.

Pivotals and mid-cap stocks bore the brunt of selling for three successive days with panic-stricken small investors joining the race. The fall was also accentuated by short selling. The panic selling was attributed to the triggering of margin calls.However there was an equally dramatic turnaround on Friday when the markets bounced back with a vengeance. The Sensex (the benchmark sensitive index of the Bombay Stock Exchange) retrieved 223 points out of the 350 points lost in the earlier three sessions to close the long week at 5816.64 points against 5946.19 a week ago. The sentiment received a boost after SEBI clarified that there was no ban on participatory notes as such though it said that such notes underlying Indian securities can be issued only to entities regulated in their home countries and further transfers, if any, of these instruments can also be only to other regulated entities. However, FIIs remained net buyers on Indian bourses to the extent of Rs. 468 crores during the week under reference. For January so far, net FII inflows was Rs. 2,139 crores compared to Rs. 6,150 crores in December last.

The markets had another source of support. In a significant development, Moody's Investor Service raised India's long-term foreign currency rating to the investment grade `Baa3' following a sharp rise in foreign balances and forecasts of higher economic growth. Improved quarterly performance from corporates has been another driving force behind the recovery. While bear operators had ignored the improved quarterly results during the last few sessions, bulls took control of the markets taking note of the impressive quarterly numbers reported by major corporates such as Tata Motors, Maruti Udyog, Tisco, Satyam Computer Services, Infosys Technologies, Wipro and Ashok Leyland to name a few. So far the Q3 numbers of corporates have been impressive with many reporting 40-50 per cent rise in net profits with 15-20 per cent growth in sales.

More corporates such as Reliance, Steel Authority of India, Indian Petrochemicals Corporation, Shipping Corporation, ABB, ICICI Bank, Dr. Reddy's Labs and Divi's Labs among others are coming out with their quarterly performance reports this week. Marketmen expect these companies to report encouraging results, which should be reflected in a further recovery in select counters.

It is being discussed in market circles whether the U.S. Senate's approval to ban sub-contracting of federal government deals abroad would have its impact on IT companies in India. The IT Minister Arun Shourie has stated that India did not do much of the outsourcing business on U.S. government contracts and hence direct impact on Indian companies would be little. According to B. Ramalinga Raju, Chairman, Satyam Computer Services, this may not have great impact on Indian IT companies. However it does not augur well for the U.S. economy, he said in a statement. ``Such decisions do not help in moving towards a free-trade policy envisaged by the WTO,'' he noted. Since the bill is yet to get President's nod the leading Indian software solutions provider hoped that the US Government would take a ``more pragmatic view and not get pressured by political considerations."

Rupee ends higher

The rupee's movements continue to be determined by demand and supply factors. The external economy's strength has been recognised by the rating agencies which have revised their ratings upwards. Internationally, there has been plenty of volatility in the currency movements vis a vis the dollar. The rupee closed at a 21½ month high of 45.35/36 to the dollar in the domestic markets.

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