Correction period for the market
Rex Mathew
19 March 2005
After the strong momentum that prevailed during the first two weeks of the month, Sensex was expected to scale the peak of 7,000 this week. Such hopes were soon laid to rest as FII's turned net sellers for the first time since end January. Weakness in world markets added to the negative sentiment and the first four days of the week saw the indices closing with losses. The last day of the week saw a relief rally coming towards close of trading which helped the indices to end higher. Both Sensex and Nifty lost more than 2 per cent each during the week.
World markets also remained week through the week as the prospect of inflation fuelled by high oil prices continues to worry investors. US unemployment data was better than expected but failed to lift the spirits of market men. The widening US trade deficit and downward revision of earnings estimates by large companies like General Motors also affected the sentiment. Asian markets led by Japan staged a smart bounce back on Friday as oil and property stocks rallied.
Crude oil made history during the week by posting an all time high. The NYMEX light sweet crude for April delivery touched $57.6 to a barrel before cooling off to settle at $56.72 on Friday. Even the decision by OPEC to increase output by 500,000 barrels had little effect on the market. OPEC is increasingly losing its ability to control oil prices as many of its members violate their production quotas at will. The official decision to raise output would only regularize the unofficial production by member countries and may not put much additional oil in the market.
While accepting that high oil demand from countries like China and India is the fundamental factor driving up oil prices, there are many who believe that at least 20 per cent of the current rise is due to excessive speculation. They point out that there are no major supply worries and enough oil is available to those who are willing to buy. This was not the situation during the previous oil rallies when supply was restricted because of wars and other disturbances. Even as winter comes to an end in the Northern hemisphere, which should normally lower demand for oil, prices continue to run up. The high volatility in oil prices in recent rallies point to greater participation by hedge funds and other speculators. Prices had shot up last August to $56 per barrel before crashing to around $40. It started going up again this year and is back above $56. Such volatility is not warranted by underlying fundamentals but by somewhat exaggerated worries about minor disturbances and supply concerns from the Middle East, Russia and West Africa.
Inflation for week ended 5 March rose to 5.3 per cent as compared to 4.95 per cent for the previous week. The increase was mainly on account of increase in prices of manufactured goods. The rate of inflation may shoot up in the coming weeks as a major upward revision of fuel prices is inevitable if crude remains at these levels. The price of Indian basket of crude oil has crossed the $50-mark for the first time ever and is hovering around $51. Oil companies are demanding a price increase of 5 to 10 per cent. Metal prices are also on the rise with copper, zinc and aluminium close to historic highs and many steel companies indicating a price hike in early April.
Could high oil prices and the resulting inflation pressure affect our growth rates? Not much, as Indian economy has attained a certain momentum and may be in a position to take higher fuel prices in its stride if they stay at these levels. If the coming monsoon is benevolent enough and helps agriculture to post at least reasonable growth, the sentiment would remain positive. The bigger worry is that rising inflation may force RBI to raise interest rates more than what is expected now, thereby dampening the credit growth being witnessed.
