Close: Markets withstood many shocks this week; giving confidence !

It was an eventful week. Sensex ended the week down about 1.7% losing about 250 points. The losses were restricted thankfully to global positives. Sentiment in markets were ready for all time lows. The RBI shook the market. Over the weekend RBI pressed the panic button by increasing CRR by 50 basis points and repo rate by 25 basis points. The move really was a big surprise. It resulted in second largest absolute loss by the Sensex ever to start the week. However the bigger reason for the loss was the poor numbers by the two wheelers bringing in worries whether the Indian growth story was ending. Bajajs Guidance of only 10% growth for next year sxet the cat among the pigeons and that had the markets biting dust. The market then managed some recovery helped by global cues. In fact Asian Markets hit all time highs but Indian markets struggled to be in positives. Sensex is down 2000 points or 15% from the highs and still struggling to find a foothold. There was another shock from the Finance Ministry this time for the cement companies where all duties on imported cement were cut to make them more competitive. Cement stocks started on the backfoot as expected but then made a smart comeback as markets realised that the imports were not feasible. However the actions of the Finance Ministry have raised questions on the intentions. There is a doubt that even exports could be banned.

The rupee kissed an eight-year high against the US dollar at Rs 42.84 per dollar. It closed at 43.09 on reports of RBI Intervention. The view is that the rupee would remain between 42.75 - 43.25 range for now. It was a holiday shortened week and Thursday saw a ranged trading session ahead of a long holiday. Crude at $ 64 + is still not comfortable but better than $ 65+. Luckily the world is headed towards a diplomatic solution to the Iran issue of capture of 15 British soldiers. The utilities did well as expected.. NTPC, Gail in such violent times.

The big gainers this week were BHEL +5%, Gail +10%, Zee +7%, SBI +4%. Losers were the two wheelers Hero Honda, - 7%, Bajaj Auto - 5% Maruti -8%. PNB - 8%, Rel Com -5%, Tata Motors -5%.

The RBI was waiting for the fiscal year end to ensure that banks bottomlines dont get hit badly. This is in a way bad news. Inflation target is 5-5.5% for the year and a number at 6.5% is not alarmingly high when economists know that the base effect will wear off in next 2-3 weeks. Does the RBI know something more than what the market does not see. We believe that it was the Government was acting in panic ahead of UP elections. We fail to see the logic of hiking rates and to the extent that was done.

The cement stocks withstood the shocks. We expected sentimental negatives. The stocks started deep negative only to recover later in the week. Clearly the scrapping of the CVD and SAD made imports competitive but the infrastructural bottlenecks makes it extremely tough to import cement. The industry has not decided to go back on the one-year price freeze commitment given to government in March. The big question is, whether the Government still wants to push it further. We believe that the risk reward is in favour of the cement stocks for now though they will not see heady upsides as earlier.

The two wheeler numbers this week were a disaster. March sales growth rates were down 2%. However what was more disappointing was the dowgrades of growth in sales by Bajaj Auto to 10% for the year from around 20%. This is a big let down specifically in the case of Bajaj Auto. March normally is a push month given the last month of the fiscal. However there was inventory correction which had all the two wheelers reporting disappointing sales. May be thats also the impact of the increasing interest rates. If thats the case, the sensitive nature of this market surprises us. An EMI increase of a couple of 100 rupees should not slow demand. The environment remains competitive. We were less concerned earlier on slower growth as we thought that the market is smart and the expectation of lower priced bikes from excise free zones was delaying demand. Spefically in the case of Bajaj Auto too we expected sales to be slower ahead of the new platform launch. Growth for FY07 is placed at just over 18% for Bajaj Auto. We still believe that Bajaj Auto's guidance of 10% is extremely conservative. But for now the stock will stick by that. The plant inauguration in the tax free zone may give it some bounce.

Four senior executives of Jet Airways have quit the airline. The ones to put in their papers are top managers V Raja, vice-president and general manager (south east Asia), Michal Chang, head of training, Nandini Verma, vice-president (communications) and senior general manager Vijay Sethi. The company says that this has not happened on a single day and has been spread out and not as serious as media makes it out to be. We attended a conference call of Spicejet yesterday. Spice is one of the leading LCCs in India and seemingly going as per plans. They have the reserves in terms of cash which was raised about a year ago. Interesting takeaway was that the consolidation has hit with Indigo having shelved 6 out 11 aircraft for not being able to pay the lease rentals. They were not lucky in raising money at the right time. Even Kingfisher had delayed couple of planes. The Management said that the airlines business was starting to see consolidationand that by March next year the struggle should ease. Also the infrastructure bottlenecks are expected to ease. The Ministry also was taking a hard view on new entrants to ensure they have much larger capital. Passenger growth was over 45% and thats attractive. However for now its still the moneyburn and shakeout time. LCCs would be the preferred model.

The Reserve Bank of India forecast a GDP growth of 8-8.5% for FY08, which is lower than the estimated growth rate of 8.5-9% for 2006-07. The Reserve Bank of India's deputy governor Rakesh Mohan stressed that reduction in inflation and inflationary expectations was the only way to raise the prospect of higher investment and economic in the country. "For the maintenance of high growth, we need to ensure inflation and inflation expectations are well-anchored, Low and stable inflation is necessary for growth. We are moving to a sustained growth path of 8-8.5%." This comes in the backdrop of expectations of 9%+ growth. Sustainable growth targets are being lowered and thats the mindset which alarms us. This is a mindset that high growth necessarily means high inflation. This is not true really. This means that government will tend to ensure that growth remains slower and we worry that in their eagerness to do so they may slow it considerably more. The impact of interest rate increases in such a short period is killing demand already. We dont think Indian Markets are ready to make new highs as rest of Asia yet.

However our strategy in the current scenario.. do we expect a bounce back for the Sensex. ? No we dont think the Sensex would bounce back in the broad based way it used to. Large order books are unlikely to excite the investors. Markets likely to become stock specific. Mid caps will be dependent on performance but that will be unlikely till there is stability. Sectors where we think action will be the Cement, Telecom where the numbers will be good and growth will be seen. Banks will make a bounce from here on lower inflation going ahead. Utilities as defensives have already run up. Performance will draw in interest from FIIs in the mid caps and thats where interest will flow to. Next week starts the results season. Watch out as we cover them.