MARKET
u p d a t e

• Inflation: The annual rate of inflation based on the wholesale price index (WPI) fell 0.11% to 6.03% for the week ended May 3, 2003 from 6.14% in the previous week. In the previous year, at the same time, the inflation rate stood at a mere 1.56%. WPI fell to 172.4 points in the latest reported week compared to 162.6 a year ago as prices of all major commodity groups headed southwards. Prices of primary articles, fuels and manufactured products moved southwards.
• Industrial Growth: India's industrial production (IIP) rose by 5.8% in FY2002-03, boosted by the robust manufacturing sector. As per CSO, industrial output was up from a meagre 2.7% in the previous year when a global and domestic slowdown hit demand. The industrial output rose by 6% in March 2003, compared to 3.2% in the same month a year ago. The manufacturing sector, which accounts for about 80% of industrial output, leaped 6% in 2002-03, compared with a meagre 2.9% in the same period a year earlier. It rose by 6.8% in March 2003, compared to 3.2% in the same month a year ago. The cumulative growth for mining in 2002-03 is at 5.8% compared to 1.2% in 2001-02. Electricity sector grew by 3.2% in 2002-03. Signalling a turnaround in industry, the capital goods sector, surged 10.34% in 2002-03, compared with a decline of 3.4% in the year-ago period. The basic good sector grew by 4.8% during 2002-03. The consumer goods sector has also perked up to 7.2% during 2002-03 as against 6% growth during previous fiscal.
• Trade Deficit: There seemed a similar increase in both exports and imports for 2002-03 in percentage terms, but trade deficit increased to $7.6 bn from $6.9 bn in 2001-02. The import bill jumped 17% to $59.4 bn from $50.7 bn, buoyed by the burgeoning cost of oil. India's exports surged by 18% to $51.71 bn in 2002-03, crossing for the first time the $50 bn milestone and surpassing the growth target of 12%. Last fiscal year exports were at $43.8 bn. India's share in world exports in merchandise goods has increased from 0.4% in 1992-93 to 0.7% in 2001 and 0.8% in 2002.
• Forex Reserves: Foreign exchange reserves touched $77.60 bn. in the week ended May 2, 2003, mainly due to the rise in the foreign currency assets.

OUTLOOK
Fiscal 2002-03 has seen strong revival of some segments of the manufacturing sector. The situation on the external front, as far as forex reserves are concerned, is very comfortable. There is a cautious stance on the inflation front, though the recent hike (over 6%) due to the rise in oil prices is expected to come down. But with the revival in economic activities and the increase in the demand for manufacturing activities, we expect inflation rate to hover above 5%.

• Call Money: Liquidity conditions remained easy. Call rates remained below repo rate of 5% for most part of the month. The surplus liquidity was evident in the huge daily subscriptions received by RBI in daily LAF repo auctions, averaging over Rs.20,000 cr.
• Govt. Securities: In the G-Sec market, despite the surfeit of liquidity, sentiments remained cautious initially on account of rising inflation over 6% level. There were mild liquidity concerns in the market on account of the on-tap state loan sale coupled with the GOI auction slated for May. News of US Federal Reserve keeping the benchmark rate unchanged at 1.25% had little impact on security prices. Nevertheless, the indication of a rate cut in future in view of rising deflation risk in US was seen as a positive indication by the market. Besides, with short-term yields crashing below the repo rate, the spread between the one-year and 10-year had reached 100 basis points. The much-awaited trigger came with news of forward premia crashing to 1% level. Given the increased arbitrage opportunities implicit in the drop in the forward premia, gilts market rallied in anticipation thereof. Security prices appreciated by 30-40 paise across tenors as the 10-year benchmark slipped to 5.89%.
• Rupee: On the currency front, the rupee mostly gained against the dollar and dollar touched multi-year lows in the global markets. Towards the end of the second week, the rupee was settled at around 47.19/dollar. Forward premia continued to slide, dipping to multi-year lows (6-month annualized at 1.26%). Ample liquidity and strong rupee outlook led the premia to drop to record low levels.
  
  

OUTLOOK
The outlook for the short and medium-term continues to be optimistic. There are no liquidity concerns at present in view of strong forex inflows as reflected in forex premia at a historic low. In view of huge build-up of liquidity, the short end of the yield curve has dropped significantly with one-year yield ruling below overnight LAF repo rate. The short-end of yield levels is thus, currently discounting an imminent repo rate cut. The mid and long segment of the curve, however, has not moved much in view of perception of neutral bias on future rate cuts. The significant steeping of the yield curve has increased the attractiveness of the mid-segment. We could thus, see heightened interest in this segment in the coming weeks.

• General: The market started the month on a positive note on the back of oversold positions and attractive valuations across sectors. The BSE Sensex was hovering between a range of 2920-2980 levels. Overall volumes improved over the previous month, though market activity was highly stock specific. Quarterly results (Q4FY02-03), which was a mixed bag, have largely been driving market sentiment of late. While frontline stocks lost ground, the focus seemed to have shifted to mid-cap stocks following their attractive valuations. Inflows from foreign funds increased significantly. FIIs, which have a significant influence on the domestic market, remained net buyers.
• Tech Stocks: Already weak on account of rising margin pressure, tech stocks remained range-bound on fears that a strong rupee would further squeeze margins for the export-driven sector.
• PSU Stocks: Fears of a possible delay in the government's disinvestment programme dragged down a host of PSU scrips, only to be followed by value-buying at lower level.
• Power Stocks: Power sector stocks rose following the passing of the Electri-city Bill. It makes the continued existence of bundled state electricity boards (SEBs) conditional on concurrence of the Centre, mandates open access in distribution apart from allowing parallel distribution systems to be set up where required, and extends the scope of captive generation to cooperative groups and associates. It envisages a competitive scenario, where regulators and private power utilities play increasingly significant roles.
• Others: Banking sector stocks rose on sustained buying interest. Action was seen auto ancillary stocks and this industry is expected to grow a substantial 40% in 2003-04. India is now being looked upon as the hub for sourcing automobile components. However, it is believed that only large auto ancillary companies with scalability, quality and latest technology may bag export orders. Reliance Industries witnessed selling pressure due to concerns about the declining prices of some of its key petrochemicals products and about the financing of the huge capital expenditure plans that the company has charted.

OUTLOOK
Globally, all the major markets worldwide have shown signs of steady upturn, after the Iraq tension receded. In India, due to the poor quarterly results posted by the Tech companies, we have not seen that kind of a rally. With regard to the fundamental attributes of the economy, in India, there is a strong case for equities this year due to its relative economic stability and better growth prospects. Over the long-term, the markets are expected to make smart rally backed by investor-friendly measures, revival in consumer demand, FII flows, lower interest rates in the economy etc.

Wholesale price index	Gilt yield curve
BSE Sensex	S&P CNX NIFTY