The Sensex made the much awaited 7000-mark during the week as the markets maintained an up trend for most of the week on the back of increased FII inflows. The Nifty also crossed the
2200- mark to post new all time highs during the week.

Most negative cues were ignored during the week as fresh liquidity pushed up stock prices. Oil prices are at a historic high and US markets saw their worst decline in the last couple of months during the week. Monsoon rains are showing great lethargy in covering the length of the country from south to north. The rains so far during the month are almost half of normal.

Sensex touched the 7000-mark on Monday itself as the Reliance pack strengthened the markets after the Ambani settlement. The index, however, could not close above 7000. On Tuesday, the Sensex closed above 7000, helped by heavyweights like ONGC, ICICI Bank and HLL and the continued strength in Reliance.

The rally continued to Wednesday as FII buying remained strong even when domestic mutual funds made substantial sales. Volumes also shot up after a spate of block deals. Retail investors were also active on reports of Japanese investors pumping more money into India dedicated funds.

Thursday saw some profit booking, though the decline was marginal when compared to the gains of previous three days. The indices scaled new heights on Friday as many large FMCG stocks saw considerable gains. Among the large stocks, ONGC and TCS strengthed the Nifty.

After declining on Monday and under-performing the frontline indices during the middle of the week, mid-caps bounced back on Thursday and Friday. The CNX Mid-cap 200 index gained well over a per cent in the last two days, bringing some cheer to the retail investors. The index also managed to close well above the 3000-mark for the week.

US markets, economy and oil

After maintaining a steady level for the first three days of the week, US markets tumbled on Thursday and Friday. The Dow closed the week with a 3 per cent loss while S&P 500 and NASDAQ lost close to 2 per cent each.

Record oil prices were the main reason for the fall in stock prices as investors have once again started to worry about the impact of higher fuel prices on consumer spending.

The fall in US weekly jobless claims to recent lows point to the continuing robustness of the job market and hence, income growth. This may encourage the Fed to hike short term interest rates again at its next meeting scheduled shortly.

US Fed chairman warned US lawmakers about increasing protectionist voices against China. He said increasing trade barriers would have little impact on protecting manufacturing jobs but would adversely affect the standard of living. However, he agreed that the Chinese currency was undervalued and should be re-valued.

Oil markets continue to boil and near month NYMEX futures touched the $60-barrel mark for the first time ever during the week. The week started on a strong note but saw some decline on Tuesday on expectations of higher US inventories and profit booking by funds.

Drop in weekly US crude inventories was lower than expected and refined products actually showed a build up in stocks. This could not prevent the commodity from touching $60 on Thursday and again on Friday.

US demand for fuel continues to grow despite the high prices and will at least remain at these levels during summer and winter even if the economy slows down. Growth in Chinese demand has been much lower at 8 per cent as compared to the over 30 per cent last year. However, China may buy more crude later in the year to build a strategic oil reserve. Construction of storage facilities for the strategic reserve is believed to be going on.

Domestic economic and regulatory action

Inflation for the week ended 11 June rose marginally to 4.33 per cent from 4.22 per cent reported for the previous week. Higher prices of fruits, poultry products and vegetables were behind the marginal rise.

The price levels may not see much variation for one more week after 11 June, but the data for the current week would show a spike from higher fuel prices. Many analysts expect average inflation to be around 5.5 per cent during the first half of the current fiscal year.

The cabinet cleared a comprehensive economic cooperation agreement with Singapore during the week. The agreement will be signed shortly during the visit of the Singapore prime minister. The agreement is the first ever bilateral comprehensive economic agreement signed by the country.

Under the agreement, Indian banks would get domestic status in Singapore and three Singapore banks would be given the same status as PSU banks in India. Customs duties will be abolished on trade between the two countries for over 500 items in the near future. A double taxation avoidance treaty will also be a part of the deal.

The government expects FDI from Singapore to increase to $2 billion and FII inflows from that country to $5 billion. Once the double taxation treaty comes into effect, many of the FII's who are currently using Mauritius as a conduit will shift to Singapore. Not much of it would be fresh inflows unless more investors from Far East enter the Indian market through Singapore.

More significant would be the impact of the treaty on FDI flows into the country. Singapore, like many other countries in the Far East, is becoming increasingly wary of the growing influence and aggression of China. Their best case scenario is India developing as a counterweight to China and the smaller countries in Asia benefiting from the growth in both India and China.

Over the last few years, the government of Singapore has been a very aggressive investor in Indian companies. It owns large stakes in such blue chips like Bharti Televentures and ICICI Bank. The scope for further investments and corporate tie-ups with Singapore companies are quite large.

India should be able to use Singapore's strengths as a global financial and trading centre to its advantage. The contribution of Hong Kong to China's rise is well recognised. Singapore could well turn out to be India's Hong Kong.

The RBI governor has been making periodic statements about the pace of retail credit growth and the quality of the retail credit portfolio. Many analysts were left wondering about the real intention behind these statements as growth in retail credit is very natural for an economy where consumer spending is expanding steadily.

It seems that the governor may be more worried about the growth in money supply, which has resulted from the rapid rise in bank credit. The contribution of overseas inflows to growth in money supply is almost negligible so far during the current fiscal, as the forex reserves have actually come down. So the governor is giving subtle indications to the banking industry to go slow on retail credit expansion.

Industry update

• After months of negotiations, the government of Orissa and Korean steel giant, POSCO, signed an MoU for a 12-million tonnes per annum steel plant. At $12 billion, this will be the single largest FDI the country has attracted so far. The initial capacity of the plant will be 3-million tonnes, which will be expanded gradually to 12-million tonnes. Development of port facilities and other related infrastructure are also part of the project.
  
• Even now there is considerable political opposition to the project, especially from the Left parties. They object to granting captive iron ore mines to POSCO and insist that the Korean company should buy ore from the state mining PSU. If they have to buy ore from outside, why would they even set up a steel plant here? They might as well set up a new plant in Korea and import ore from India or elsewheren.
  
• The second objection is to the export of iron ore by POSCO. The Korean company says Indian ore is of inferior quality and therefore has to be mixed with higher quality ore for optimum plant performance. Whatever be the technical merits of this claim by the Korean company, there will be no net export of ore by POSCO from the country — it will merely export Indian ore and import equal quantity of higher quality ore to be used in the Indian plant.
  
• The politicians objecting to the export of ore seem oblivious to the fact that the country has been a significant exporter of iron ore for many decades now. The more interesting fact is that most of these exports are done by PSU companies. Exports are allowed as long as they done by a PSU, but a foreign company willing to invest over Rs50,000 crore cannot do it even if there is no net export. Strange logic indeed! Going by this logic, all oil producing countries should stop exporting crude and insist that consuming countries buy petrol, diesel and petrochemicals from them!
  
• The entry of POSCO could have significant implications for the domestic iron and steel industry. The Korean major has clearly stated that it will be mainly focussing on the domestic markets for its sales. The company would start with carbon steel and would later expand the portfolio to value-added products. Besides, the plant will use a technology which is new in India and considered to be more efficient than the technologies used by Indian steel companies.
  
• Indian companies have also announced massive expansion plans including a few plants of 5- and 6-million tonnes per annum capacity. If all these plants do come up as per the stated schedule, the domestic industry could see significant excess capacities in the medium term. If there is an economic slowdown or a downturn in steel prices, things could look far uglier than in the late '90swhen most steel companies were on the sick bed.
  
• After months of indecision, the government finally hiked prices of petrol and diesel while leaving kerosene and domestic cooking gas prices unchanged. The quantum of hike was much lower than the demand by oil marketing companies. If crude prices continue to remain high, oil companies would continue to lose money.
  
• In the past, the average price of crude oil bought by Indian companies was much lower than the benchmark NYMEX light sweet crude. India buys a mix of light crude and the heavier crude, which used to be much cheaper than light crude, from Middle East. With the prices of heavy crude also going up significantly, the gap between light and heavy crude has come down. The price of Indian crude basket is currently close to $55 to a barrel, which is just 10 per cent lower than the NYMEX crude.
  
• Indian refiners also benefit from the lower prices payable to domestic oil producer ONGC. ONGC produces mostly light crude but the price it is allowed to charge the refiners is much lower than international prices. Though the company has been demanding international prices for a long time now, government may not allow this in the near future when international prices are high.
  
• The argument that the government could have reduced the various duties on petroleum products and kept the retail prices at the same levels do have merit. Governments, both present and past, have treated petroleum products like a cash cow as they are easily taxable. More than 50 per cent of the retail price of petrol is collected by the central and state governments as taxes. This is too high a burden on the consumer.
  
• Even while agreeing that the government should utilise every possible avenue for revenue generation, one still feels it could have restructured the duties to lessen the cost impact on the economy. This is more so since total revenues from duties on petroleum products have gone up significantly along with fuel consumption. It is almost a given that total revenues would continue to rise even if duties are reduced moderately. Maybe, it is time for Chidambaram to implement the 'lower tax rate, higher tax revenue' theory in indirect taxes at least for fuel as well!

Corporate moves

• MS Banga has stepped down as chairman of Hindustan Lever as he moves on to Unilever to head its global food business. Banga's tenure at the top has been painful for HLL investors, who have seen the share price almost halve even when the market has more than doubled.
  
• Banga inherited a company with a stated intention of doubling its profit every three years and sales every years. Forget doubling, the turnover and profits have been stagnant for during his tenure. Complacency on the part of the company and aggression from competitors led to the decline of a company which has always been a stock market favourite.
  
• To be fair to Banga, the company he inherited was not in the pink of health. HLL's growth strategy relied more on acquisitions than building own business. This had led to lot of costly acquisitions by his predecessors which later became a drag on the company's performance. Banga did indeed divest many such businesses with combined revenues of over Rs2,000 crore during his tenure.
  
• But what hurt HLL most was the price war unleashed by P&G in the detergents space. Prices of detergents almost halved across segments and this hurt both volume and profit growth. The inability of the company to grow its foods business, where it had spent a lot of money and effort, also led to the under performance.
  
• Now that the company is much leaner and focussed, can HLL re-start its growth engine? Over the short to medium term, the company should do better especially since the price wars have almost come to an end. Over the longer term, the emergence of large retail chains and discount stores who have phenomenal bargaining power will affect the margins. The company's ability to create exciting new brands, a skill which was associated with the HLL of old, is still under question.
  
• One bank which is fast replicating its domestic aggression in overseas markets is ICICI Bank. The largest private sector bank has a stated target of increasing contribution from overseas business to 25 per cent in the next three years. To achieve this, it is fast expanding in markets like Canada and UK. The recent acquisition of a small Russian bank would help it enter that market as well.
  
• A distinct feature of ICICI Bank's overseas strategy is to adapt its core domestic strategy of low-cost high-technology operations in those markets as well. It is leveraging its learning from the last decade or so, especially in domestic retail banking. By keeping the entire back office and sometimes even the middle level support entirely in India, the bank is able to keep the overseas operations very lean with the minimum staff for front-end customer interface and sales.
  
• The success of this strategy is evident in its Canadian operations which has built an asset base of over $200 million in just over a year. SBI, which has been present in Canada for over a decade, has a lower asset base there. Now ICICI is expanding its UK network and is considering expansion in US, Hong Kong and Sri Lanka. The bank already has a tie up with Wells Fargo bank of the US for fund transfers into India.
  

*Disclaimer: The author doesn't have any position in the stocks specifically mentioned above at the time of writing this article. This analysis/report is only for the purpose of information and is not an investment advice. Readers are advised to consult a certified financial advisor before taking any investment decisions. While efforts have been made to ensure the accuracy of the information provided in the content the author or publisher shall not be held responsible for any loss caused to any person whatsoever.

Other articles by Rex Mathew

List of general reports on markets

List of general reports on finance