Markets opened the week on Monday on a firm note after oil prices declined and US markets went up strongly. The amendments made to the fringe benefit tax proposals by the government supported the markets on Tuesday.

On Wednesday, the indices surged as the US Fed's decision on interest rate and its outlook on growth and inflation was on expected lines. The decline in oil prices further added to the positive sentiment.

Thursday saw all-round buying in bank stocks as the union cabinet approved changes to banking regulations, which would make acquisition of domestic banks easier for foreign players. Indices gained well over a per cent each though volumes remained low.

Markets managed to close the week on a positive note as a late surge pushed the indices up. Trading volumes remained much lower throughout the week.

US markets rallied after the Federal Reserve's decision to hike short term interest rates by 25 basis points on Tuesday. Despite recent data showing some slowdown in growth rates and pressure on price levels, the Fed believes the longer term outlook on both economic growth and inflation is stable.

News of billionaire investor Kirk Kerkorian increasing his stake in General Motors kept the US markets alive on Wednesday. However, the sentiment was affected on Thursday as rating agency Standard and Poor's downgraded the bonds of both General Motors and Ford to junk status. The downgrade was expected as the US auto majors are finding it difficult to defend their market share, but the markets were surprised as it came much earlier than expected.

Better than expected job growth reported on Friday led to a firming up of stock prices in the US and some Asian markets like Japan. The data helped in reducing fears of an economic slowdown. The positive sentiment was tempered later on Friday as some analysts took the view that a rise in employment would force the Fed to raise interest rates at a faster pace in future.

After declining to below $49 to a barrel earlier in the week, crude oil futures on NYMEX recovered part of its losses by the end of the week. This up move, despite a further increase in the US crude stockpile, surprised many who were expecting a further decline in oil prices. Crude closed the week above $51 to a barrel or more than 2 per cent above last week's close.

Inflation for the week ended 23 April rose to 5.91 per cent from 5.64 per cent reported for the week before. The rise in inflation was on account of higher prices of food articles like tea and vegetables and manufactured goods like basic metals and metal products. There is growing evidence of increasing pricing power as manufacturers are passing on the rise in input costs to consumers. In such a scenario, the government will have a tough time deciding on the timing and quantum of fuel price hike.

The big policy development of the week was the union cabinet's decision to do away with the 10 per cent cap on voting rights in banks. Widely seen as a major step towards opening of the domestic banking industry, the decision could possibly lead to acquisition of domestic private sector banks by global majors. However, amendments to the Banking Regulations Act need to be passed in parliament before the decision takes effect.

Political opposition to the move however remains. The banking sector has the strongest labour unions and they are opposed to the opening up and even mergers between public sector banks. Their political backers, the left parties, have already indicated that they will vote against the bill in parliament.

Employee unions in the older banks are opposed to even large domestic private banks taking management control. The recent fight between the management of Federal Bank and ICICI Bank, the single largest stake holder in Federal Bank, is ample proof of how difficult it will be for foreign banks to acquire ownership even if they are allowed to. The management of Federal Bank was forced into taking on ICICI Bank by the employees who want the south-based bank to remain independent.

Given the current state of relationship between the government and the opposition, no opposition support can be expected for the bill even though they may not have any ideological issues in supporting it.

Even if the government manages to get the bill passed, the banking roadmap of the RBI does not allow takeovers of stronger domestic banks till the year 2009. Therefore, the benefit of policy change will be limited to the small and regional banks that are unable to meet capital adequacy norms.

Nevertheless, the decision is significant as the government is making a clear statement about its intentions on banking sector reforms. The real benefit may be visible only after the lengthy process of political consensus building.

Corporate Results

• Housing Finance major HDFC reported a growth of over 16 per cent in profits for the quarter ended March 2005, which is lower than the growth rates for the previous quarters. The company's disbursals have grown 30 per cent indicating robust demand growth and total income is also up more than 15 per cent. However, the company is facing some pressures on margins as cost of funds is inching up gradually.
  
• Maruti reported a more than 60 per cent growth in net profits for the quarter ended March 2005. The company improved its operating margins by reducing marketing expenses even as input costs have increased. The company is facing increasing pressure to maintain its market share as competitors grow at a much faster pace. The company admits that it is suffering from an increasing consumer preference for diesel vehicles. The soon to be launched Swift may not add much to the volumes going by the reception for a similar model from Hyundai. The expansion of Maruti's capacity will be complete only by 2007 and the company may face stagnant growth till then.
  
• Dr. Reddy's continues to suffer from the price declines in generic drugs and absence of new big ticket product launches. For the year ended March 2005, the company's profits have dropped to Rs65 crore from Rs283 crore reported for the previous year. Revenues have also declined marginally. The company's last quarter performance was affected by a one time charge related to the acquisition costs of US-based Trigenesis. Going forward, the company's R&D costs would come down as a result of its deal with ICICI Ventures to finance research. The company would definitely see a few more difficult quarters while it waits for its primary research and generic development to bear fruit.
  
• ICICI Bank reported better than expected results for the quarter ended March 2005 as profits surged 35 per cent. Interest spread has improved to over 2 per cent as the bank clears the higher cost liabilities of erstwhile ICICI which was merged into the bank. Retail credit continues to maintain its growth. Going forward, the bank is confident of maintaining the growth momentum as corporate credit demand is on an upswing. The bank would face difficulties in meeting capital adequacy norms given the pace of growth in credit. The company is planning to raise capital by selling part of its stake in the insurance and infotech subsidiaries as well as securitising part of its assets.

Corporate moves

• In what could be the largest ever corporate takeover by a consortium led by Indian companies, The Chatterjee Group (TCG) along with US-based Access Industries is acquiring Basell NV for over $5 billion. Basell, a joint venture between oil giant Shell and chemicals major BASF of Germany, is the largest producer of poly propylene in the world and has revenues of more than $8 billion. Kolkata-based Haldia Petrochemicals, promoted by TCG and the government of West Bengal, will be a member of the consortium. ICICI Ventures may also become a minority partner in the consortium.
  
• Tata Motors launched its small commercial vehicle, the first of its kind in the country, in the Southern states. The mini-truck with a capacity of less than one tonne will compete with large three-wheeled goods carriers marketed by Bajaj Tempo, M&M and Piaggio. Tata Motors plans to sell more than 30,000 vehicles per annum and may also launch a passenger vehicle, similar to Maruti's Omni, on the same platform.
  
• Tata Motors is also planning to launch advanced luxury buses to take on Volvo India. The company may use platforms sourced from its Korean subsidiary, Daewoo Commercial. After the cancellation of its contract with MG Rover for exporting cars with European specifications, the company is planning to market such cars in South Africa. The company's much talked about Rs1-lakh car is in the prototype stage and may make its debut in the year 2008.
  
• Apart from market leader Maruti, most other auto companies reported excellent volume growth in April sales. Hyundai's domestic sales more than doubled while exports nearly doubled as compared to April of previous year. Honda reported a growth of close to 30 per cent while Tata Motors reported a more modest 7 per cent growth in passenger vehicle sales. Maruti's total volumes dropped 4 per cent as sales of the 800 model saw a massive decline of close to 40 per cent.
  
• Two wheeler manufacturers had an excellent month for April as they reported better than expected volume growth. Bajaj Auto's motor cycle sales increased more than 50 per cent while market leader Hero Honda reported a more modest 20 per cent increase. In absolute terms, however, Bajaj Auto is far behind Hero Honda. Bajaj reported monthly sales of 138,000 motorcycles as against 235,000 by Hero Honda in April.

Outlook: The current up move may not have much steam left as it is not backed by good volume. Corporate results are mostly on expected lines and may not have much of an impact on direction. Overseas inflows may not see a dramatic improvement in the immediate short term. Before a better look at the monsoons, the only development that can affect the market direction is a possible settlement to the Reliance feud.

Other articles by Rex Mathew

List of general reports on markets

List of general reports on finance