Equity Market

Overview: The BSE Sensex was at 13480.02 in the beginning of the month and Nifty was at 4039.75. By the end of the month, Sensex was at 14355.75, up 875.73 points (6.5 %), and Nifty was at 4332.95, up 293.2 points (7.26 %). Mid-cap index began at 5383.86 and closed at 5567.37, up 183.51 points (3.41 %), while Small-cap index open at 6703.59 and ended at 6912.71, up 209.2 points (3.12 %). July also saw FIIs net selling stocks worth Rs 1836.80 cr. Domestic Mutual Funds continued to be net buyer in July to the tune of Rs 1412.20 cr. During the month; AUTO, BANKEX, CD, FMCG, OIL & GAS, POWER, PSU, REALTY indices saw upward movement while HEALTHCARE, IT, PSU & TECHNOLOGY indices showed downward movement. During the period, PSU sector was the biggest gainer (up18.40%) and IT index was the biggest loser (down 8.71%). Stabilising inflation, declining crude price and political stability provided the backdrop for recovery.

Outlook: The recent hike in repo rate and CRR will negatively impact the growth of interest rate sensitive sectors like Housing and Auto. Following high rates of interest, many corporates have deferred their expansion plan. Foreign investors have been selling aggressively this year and continued selling in July also. Post vote of confidence there is now hope that the stalled reform process will carry on. In the near term, the market trend may also be dictated by the progress of the monsoon. The sectors expected to perform well are FMCG, Telecom, Sugar, Power and Fertilizers and Retail. We believe that market will reflect movement in crude price this month.

Debt Market

Alongside the quarterly review of annual statement on monetary policy, RBI raised the repo rate by 50 basis points to 9 percent, the third increase in two months. In addition, the cash reserve ratio was raised by 25 basis points to 9 percent w.e.f. August 30, 2008. Money supply growth increase to 20.5%, above the RBI’s target of 16.5-17% is the key reason for the hikes. The WPI based annual rate of inflation rose to 11.98% for the week ended July 19, 2008, compared with 11.89% in previous week and 11.42% on June 14, 2008. The policy action aims to bring down the current high level of inflation to 5.0 percent ultimately and to 7.00 percent by March 31, 2009.

After the policy, the prices of 10-year GOI benchmark paper fell by around Rs. 3, while the yield rose to a high of 9.55%. However during the day prices recovered and yields closed at 9.40%. Liquidity in the system continues to be tight as call rate touched 9.50% towards the end of month from 8.25% earlier. Crude oil prices have come down to around $121/barrel after touching all time high of $147/barrel providing some relief. Continued decline in crude oil prices can reduce inflationary expectations and moderate RBI’s stance.