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Weekly Market View: On the edge

If the Sensex goes below 17,300, a new leg of decline will be confirmed

The markets started the week on a positive note, but concerns about the pace of the global economic recovery resulted in the key benchmarks closing the week in the red for the first time in three weeks. Even the positive manufacturing indicators from across the globe and the country's robust export growth report could not help the market. For the week, the Sensex and the Nifty declined 1%.

Oil and Natural Gas Corporation (ONGC) and NTPC (up 3% each), Reliance Infrastructure (R-Infra)-up 2%, and Larsen & Toubro (L&T) and Hindustan Unilever (up 1% each) were the top gainers on the Sensex. The losers on the Sensex were led by Sterlite Industries (down 5%), Jindal Steel & Power (JSP) (down 4%) and Tata Steel, Hindalco Industries and Cipla (down 3% each).

Among the sectoral indices on the BSE, consumer durables was up 3% and oil & gas gained 1%. Metal (down 3%) and IT (down 2%) were the top losers.

The six core infrastructure industries grew 5% in May against 3.2% in the same month last year. However, on a monthly basis, the key sectors-crude, petroleum refining, coal, electricity, cement and finished steel-showed a decline as they had expanded by 5.4% in April 2010.

While crude oil production rose 5.8% in May, finished steel grew at 2.5%, petroleum refinery output grew by 7.7%, coal production slowed to 0.1%, cement output slowed down to 8.6% but electricity generation more than doubled at 6.4%.

After winning the turf war with the markets regulator Securities and Exchange Board of India (SEBI) over Unit-linked Insurance Plans (ULIPs), the insurance watchdog Insurance Regulatory and Development Authority (IRDA) tightened the norms for these schemes by raising the lock-in period and raising the insurance cover on them.

The lock-in period for all ULIPs has been increased from three years to five years, including the top-up premiums, thereby making them long-term financial instruments which basically provide risk protection. Besides insurance cover on such products, the premium has also gone up to 10 times of the first-year premium compared to the existing five times.

Commercial banks have fixed their minimum lending or base rate as high as 8.5%, even as major players, including HDFC Bank and Citibank, pegged their rates below the 7.5% announced by SBI and ICICI Bank. Base rate is the new interest regime, which replaces the benchmark prime lending rate (BPLR) system, and will be introduced from 1st July as per the Reserve Bank of India (RBI) directive for ensuring transparency in the lending system and guarding against cheaper credit to the lucrative corporate sector at the cost of other borrowers.

Monsoon rains, crucial for the country's economy, have been 16% deficient and stagnant over central India so far this season but meteorologists are hopeful of a revival soon. According to statistics released by the India Meteorological Department (IMD), the monsoon rains have been 16% below normal for this season. Annual rainfall has not advanced since 18th June when they had covered half of the country.

The growth of the manufacturing sector eased in June slightly from the 27-month high in May and the pace of hiring slowed down on comparatively weak demand, according to the HSBC's Purchasing Managers Index report. The Manufacturing Purchasing Manager's Index (PMI), compiled by HSBC on a survey of 500 companies, slipped to 57.3 points in June from 59 in May.

Food inflation declined by a huge 3.98 percentage points to 12.92% for the week ended 19th June, as the rate of price rise in cereals and vegetables showed a remarkable drop due to high base effect. The fall in food inflation would provide a breather to the government, which is struggling hard to control prices of essential items that may again rise due to the cascading effect of the diesel price hike last week, say analysts.

In a development after market hours on Friday, the Reserve Bank of India (RBI) raised the short-term lending and borrowing rates by 25 basis points (bps) with immediate effect to contain inflation. The move, which comes weeks ahead of the scheduled policy review by RBI on 27th July, is expected to raise the cost of funds for banks and temper demand for loans, and in turn, consumer spending.

The central bank raised both repo and reverse repo rates (the rates at which the RBI lends and borrows short-term funds from commercial banks), by 25 bps to 5.50% and 4%, respectively.

On the global front, Japan's retail sales expanded for the fifth straight month in May, though the growth in spending lost momentum as government stimulus measures faded. Retail sales rose 2.8% from the same month a year earlier, the government said on Monday.

World leaders agreed on Sunday (27th June) to take different paths for cutting budget deficits and making their respective banking systems safer. In a reversal from the unity of the past three crisis-era G-20 summits, the leaders left room to move at their own pace and adopt "differentiated and tailored" policies.


RNRL to merge with Reliance Power; board meeting on 4th July

While the companies did not disclose any details of the proposed merger, some brokers said that rumours are about a share-swap deal with four shares of RNRL for every one Reliance Power share

Anil Ambani-led Reliance Power's (RPower) board will meet on 4th July to consider merging another group firm Reliance Natural Resources (RNRL) with itself, reports PTI.

A meeting of RPower's board of directors has been called on Sunday to consider the merger, the company said in a statement.

The statement was released after the close of stock market, but speculation about the deal pulled down the shares of both the companies sharply in the last minutes of trading.

While the companies did not disclose any details of the proposed merger, some brokers said that rumours are about a share-swap deal with four shares of RNRL for every one RPower share. Currently, the two stocks have market values in the ratio of about 1:3.

The two companies together command a market capitalisation of Rs50,000 crore.


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