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Motilal Oswal will list on September 11, 2007

Weekly Newsletter

Global central banks pause to calm markets

With the Federal Reserve Chairman Ben Bernanke expressing his willingness to cut rates to stabilise the markets, other central banks continued their efforts in restoring investor confidence and ease the liquidity squeeze. As expected, the European Central Bank (ECB) and the Bank of England (BOE) maintained a status quo on interest rates so did central banks in Brazil, Australia, Canada and South Korea. But, the People's Bank of China hiked the reserve requirement for banks yet again to cool down the overheated economy. The central bank in Sweden raised a key rate by a quarter percentage point to quell inflation.

Not only did the central banks decided to hold rates steady, they also injected cash to combat the liquidity crunch arising out of the meltdown in the US housing sector, especially the subprime mortgages. The ECB added €42.2bn (US$57.7bn) in emergency cash to ease a credit drought that had pushed overnight deposit rates to a six-year high. The BOE offered extra money to reduce unusually high overnight rates. Australia's central bank said it will buy debt backed by home loans to add cash to the financial system. Central banks have added more than US$400bn to money markets since Aug. 9 to ease lending between banks.

The BOE issued an accompanying statement, signalling its awareness of market conditions. It was only the third time in the decade-long history of the bank's policy-setting body had done so while holding rates on hold (the last occasion being May 1999). ECB president Jean-Claude Trichet signaled that no rate increase was likely next month either, and added that providing extra liquidity was essential as an element of confidence. He promised the ECB would provide funds at whatever price at whatever interest rates the market has to function.

The Organization for Economic Cooperation and Development (OECD) cut its forecasts for US and European economic growth and said they may be reduced further following the rout on financial markets. The ECB too reduced its forecast for growth in Europe this year, and warned that continued volatility in financial markets could dampen its projections further. Meanwhile, China asked its banks to set aside more money as reserves to cool lending and investment after inflation accelerated to a 10-year high. The reserve ratio will increase 0.5% to 12.5% on yuan deposits starting Sept. 25. The ratio is now the highest in almost 10 years.

Bajaj-TVS spar over engine technology

A major fight broke out between two-wheeler majors Bajaj Auto and TVS Motor over the use of twin spark plug technology. While Bajaj Auto accused TVS of stealing its so-called 'DTSi' technology used extensively across bikes, TVS shot back saying the technology has been known for years, and therefore cannot be a proprietary technology of Bajaj Auto. Countering Bajaj Auto's charges of technology infringement, TVS said it would press libel charges against its Pune-based rival for making malicious allegations, and insisted that the latter withdraw all the charges against it.

Last week, TVS introduced seven new products, including a new 125 cc bike, called Flame. This led to Bajaj Auto threatening legal action against its smaller rival for what it said was a violation of intellectual property rights. Though the engine of Flame is of a similar size and employs the twin spark plug technology, TVS said its technology does not infringe Bajaj Auto's patent in any way. TVS said the concept of using twin spark plugs in motorcycles is old and existed even before Bajaj Auto introduced it in India. TVS said it has developed the CC-VTi engine in association with Austrian company AVL.

TVS filed an application for revoking Bajaj’s DTSi patent, and Bajaj Auto said it has received the Chennai-based manufacturer’s application seeking to revoke its patent. "If our IPR is violated, we shall defend it," Bajaj Auto chairman Rahul Bajaj said. On the other hand, TVS Chairman Venu Srinivasan said, "We are taking the advice of our counsel." He, however, declined to comment on the company’s future course of action. Meanwhile, Bajaj Auto MD Rajeev Bajaj said the company would wait for TVS’ Flame to be out in the market to decide on its future course of action.

On the business front, TVS said the launch of Flame (initially scheduled for November) is on course for October launch. Bajaj Auto, Meanwhile is busy preparing for the launch of its much hyped new 125 cc bike, 'Exceed' over the coming weekend. Separately, a media report indicated that Srinivasan and Rajeev Bajaj may have decided to burry the hatchet at a closed-door meeting at the SIAM Annual convention in New Delhi. Still, with competition in the sector getting stiff and stakes being so high, it remains to be seen whether the two companies will end up in court or decide to go for an out-of-court settlement.

Market up for 3rd straight week

Despite the slight fall on the last trading day of the week, the key indices managed to rise for a third week running, putting behind last month's crash due to the global market meltdown and concerns on the political front. The benchmark Sensex added 1.8% or 271 points to close at 15590 and the NSE Nifty advanced by 1% or 45 points to 4510.

Power, Banking, FMCG, Pharma and Cement stocks led the rally on the bourses. The small-cap stocks continued their dream run with the BSE Small-Cap Index hitting an time high of 8289.81 during the week. The Indian bulls managed to overcome the recent misery on the back of buying from both FIIs and MFs.

The 14 new entrants in the F&O segment had a terrific debut, as institutions rushed to take positions in these stocks. Reliance Capital and BNP Paribas acquired 2.2 lakh and 1.2 lakh shares, respectively of LMW at Rs2925. Others like Aptech, Bhushan Steel and NIIT Tech also had a good run over the week.

Value buying was seen in FMCG shares with HUL and ITC leading from the front. Also, expectations of good quarterly numbers next month have been driving interest in these counters. ITC surged by over 4% to Rs177, Hindustan Unilever advanced by 2.5% to Rs213 and Tata Tea gained 1.1% to Rs761.

Strong set of monthly sales by cement companies and buoyant domestic demand helped cement stocks record concrete gains. Also, there were reports that Pakistan has raised the prices of cement, helping ease concerns of cheaper cement entering India. There was also talk of a fresh round of price hike in the local market post monsoon. Grasim climbed by over 8.5% to Rs3182, Ambuja Cements rose by over 5% to Rs140 and ACC added 2% to Rs1086. Among the Mid-Cap stocks Kesoram, India Cements and Mangalam Cement were the major gainers.

Power stocks continued their winning streak led by gains in REL, NTPC and Tata Power. REL rose on reports that the company may sell shares in the new engineering unit. NTPC also had a good run as the Government plans to divest 4.75% of its stake in the company. REL was the top gainer in the Sensex. The scrip rose over 9% to Rs850. NTPC jumped by over 8% to Rs187 and Tata Power surged by over 5% to Rs718.

Banking stocks had another good week, as speculation increased about a possible rate cut by the Fed. The BSE Banking index gained 3.2% on the week. Mid-Cap stocks were in the limelight. Dena Bank, Axis Bank and Bank of Rajasthan were among the top gainers. ICICI Bank rose over 3.5% to Rs920, HDFC Bank gained 2.1% to Rs1196 and SBI added 1.2% to Rs1620.

Sensex eyes 16k

That we are heading towards 16k on the Sensex is sure now, with the market rebounding sharply over the past three weeks. The big question is how much more time it will take for the Sensex to get there and will the market sustain for long above that level. There could be a few hiccups before the main indices hit their new lifetime highs. But, nothing to unduly worry about, as renewed buying from FIIs will ensure that they will get there as early as next week. Still, one should not get carried away by these statistical events, as they tend to distract attention from the critical issue, which is to focus on one's personal holdings. Last time the bulls hit historic highs, the fall from grace proved to be too tough for them. The current momentum suggests that the same may not get repeated, though one has to keep a close eye on global developments as well as the developing political situation in the country. All eyes and ears are on the Federal Reserve. The American central bank is expected to move swiftly to prevent a recession but the moot point is whether it will be enough? Investors should continue to be wary of any rise and play safe by booking some profits. A correction is overdue as the valuations look expensive and there are no major positive triggers.

Weekly Stock Ideas

Buy R Com (545)
SL 536 Target 565, 570

Buy Escorts (103)
SL 97 Target 113, 116

Buy Crompton Greaves (324)
SL 317 Target 335, 340

Buy Voltas (150)
SL 145 Target 160, 163

Buy PFC (195)
SL 189 Target 207, 211

Bullish on growth, complexity a challenge

Y V Reddy, Governor, Reserve Bank of India (RBI), today reiterated the growth story of India.

"There is growing evidence that the upward shift in growth trajectory in India is of enduring nature as it is supported by high saving and investment rates, improved productivity and vast potential lying by way of demographic dividend. However, it is still important for monetary policy formulation to identify the cyclical and structural components of growth achieved in recent years despite this task being rendered somewhat difficult in an economy that is undergoing a rapid and deep structural transformation," Reddy said in his address at the Sveriges Riksbank, Stockholm, Sweden today.

Striking a note of caution, Reddy said: "Monetary policy is but one element in the complex web of challenges to public policy, and there may be occasions when purely technical responses to monetary policy challenges would be less than appropriate.

"Public policy, including monetary policy, has to reckon with the complexity of managing these multiple transitions. We are fortunate that we have a supportive and stable political system and well functioning public institutions.

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We, in the Reserve Bank, are conscious of these complexities and approach issues in a flexible manner with a sense of humility."

Given below is the complete speech by Dr. Reddy:

Friends,

I am honored by the kind invitation of Governor Stefan Ingves to visit Riksbank and give an address at the central bank. It is a great privilege to address an august gathering in the oldest central bank in the world, Riksbank. I came in close contact with Governor Ingves when he was working with the IMF. As a Director in the Executive Board of IMF, I have been an admirer of Mr. Ingves when he headed the Monetary and Exchange Affairs Department, which has now become the Monetary and Capital Markets Department. During his tenure in the IMF, he was instrumental in spearheading the Financial Sector Assessment Programme, which stands today as an important tool for crisis prevention. His comments in recent years on various fora as Governor reflect both his excellent professionalism and proven pragmatism. We, in the Reserve Bank, look forward to continued collaboration with Riksbank. Thank you Governor, for inviting me to your wonderful country, which I visited as a student on vacation in 1968. My address today is on a theme traditionally close to the heart of any central banker. A review of the recent developments in the Indian Economy would be done in the first section. Second, I would review the trends in monetary policy challenges globally and for emerging market economies (EMEs) in particular. In the third section, I would explain the monetary policy framework in India. Some issues in the conduct of monetary policy in India would be covered in the fourth section followed by a few concluding observations. I. A Review of Outcomes Growth with Stability The average growth rate of the Indian economy over a period of 25 years since 1980-81 has been impressive at about 6.0 per cent, which is a significant improvement over the previous three decades, when the annual growth rate was only 3.5 per cent. Over the last four years during 2003-07, the Indian economy has entered a high growth phase, averaging 8.6 per cent per annum. The acceleration of growth during this period has been accompanied by a moderation in volatility, especially in industry and services sectors. An important characteristic of the high growth phase of over a quarter of century is resilience to shocks and considerable degree of stability. We did witness one serious balance of payments crisis triggered largely by the Gulf war in the early 1990s. Credible macroeconomic, structural and stabilization programme was undertaken in the wake of the crisis. The Indian economy in later years could successfully avoid any adverse contagion impact of shocks from the East Asian crisis, the Russian crisis during 1997-98, sanction like situation in post-Pokhran scenario, and border conflict during May-June 1999. Seen in this context, this robust macroeconomic performance, in the face of recent oil as well as food price shocks, demonstrates the vibrancy and resilience of the Indian economy. The Reserve Bank projects a real GDP growth at around 8.5 per cent during 2007-08, barring domestic and external shocks. Poverty and Unemployment The sustained economic growth since the early 1990s has also been associated with noticeable reduction in poverty. The proportion of people living below the poverty line (based on uniform recall period) declined from 36 per cent in 1993-94 to 27.8 per cent in 2004-05. There is also some evidence of pick-up in employment growth from 1.57 per cent per annum (1993-94 to 1999-2000) to 2.48 per cent (1999-2000 to 2004-05). Consumption and Investment Demand India's growth in recent years has been mainly driven by domestic consumption, contributing on an average to almost two-thirds of the overall demand, while investment and export demand are also accelerating. Almost one-half of the incremental growth in real GDP during 2006-07 was on account of final consumption demand, while around 42 per cent was on account of the rise in real gross fixed capital formation. The investment boom has come from the creation of fixed assets and this phenomenon has been most pronounced in the private corporate sector, although fixed investment in the public sector also picked up in this period. According to an estimate by the Prime Minister’s Economic Advisory Council, the investment rate (provisional) crossed 35 per cent in 2006-07 from 33.8 per cent in 2005-06. A Reasonable Degree of Price Stability High growth in the last four years has been accompanied by a moderation of inflation. The headline inflation rate, in terms of the wholesale price index, has declined from an average of 11.0 per cent during 1990-95 to 5.3 per cent during 1995-2000 and to 4.9 per cent during 2003-07. The trending down of inflation has been associated with a significant reduction in inflation volatility which is indicative of well-anchored inflation expectations, despite the shocks of varied nature. Although, inflation based on the wholesale price index (WPI) initially rose to above 6.0 per cent in early April 2007 it eased to 3.79 per cent by August 25, 2007. Pre-emptive monetary measures since mid-2004, accompanied by fiscal and supply-side measures, have helped in containing inflation in India. The policy preference for the period ahead is strongly in favour of price stability and well-anchored inflation expectations with the endeavour being to contain inflation close to 5.0 per cent in 2007-08 and in the range of 4.0–4.5 per cent over the medium-term. Monetary policy in India would continue to be vigilant and pro-active in the context of any accentuation of global uncertainties that pose threats to growth and stability in the domestic economy. Improved Fiscal Performance Yet another positive outcome of developments in recent years is the marked improvement in the health of Government finances. The fiscal management in the country has significantly improved consistent with targeted reduction in fiscal deficit indicators after the adoption of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 by the Central Government. The finances of the State Governments have also exhibited significant improvement since 2003-04 guided by the Fiscal Responsibility Legislations (FRLs). With gross fiscal deficit of the Central Government budgeted at 3.3 per cent of GDP in 2007-08, the FRBM target of 3.0 per cent by 2008-09 appears feasible. The revenue deficit is budgeted at 1.5 per cent of GDP for 2007-08; the FRBM path envisages elimination of revenue deficit in 2008-09. External Sector India’s linkages with the global economy are getting stronger, underpinned by the growing openness of the economy and the two way movement in financial flows. Merchandise exports have been growing at an average rate of around 25 per cent during the last four years, with a steady increase in global market share, reflecting the competitiveness of the Indian industry. Structural shifts in services exports, led by software and other business services, and remittances have imparted stability and strength to India’s balance of payments. The net invisible surplus has offset a significant part of the expanding trade deficit and helped to contain the current account deficit to an average of one per cent of GDP since the

early 1990s. Gross current receipts (merchandise exports and invisible receipts) and gross current payments (merchandise imports and invisible payments) taken together, at present, constitute more than one half of GDP, highlighting the significant degree of integration of the Indian economy with the global economy. Greater integration into the global economy has enabled the Indian corporates to access high-quality imports from abroad and also to expand their overseas assets, dynamically. The liberalised external payments regime is facilitating the process of acquisition of foreign companies by Indian corporates, both in the manufacturing and services sectors, with the objectives of reaping economies of scale and capturing offshore markets to better face the global competition. Notwithstanding higher outflows, there has been a significant increase in capital inflows (net) to almost five per cent of GDP in 2006-07 from an average of two per cent of GDP during 2000-01 to 2002-03. Capital inflows (net) have remained substantially above the current account deficit and have implications for the conduct of monetary policy and macroeconomic and financial stability.

With the significant strengthening of the current and capital accounts, the foreign exchange reserves have more than doubled from US$ 76 billion at the end of March 2003 to US $ 228.8 billion as on August 31, 2007.

Financial Stability

The Indian record on financial stability is noteworthy as the decade of the 1990s has been otherwise turbulent for the financial sector in many EMEs. The approach towards the financial sector in India has been to consistently upgrade it by adapting the international best practices through a consultative process. The Reserve Bank has endeavoured to establish an enabling regulatory framework with prompt and effective supervision, and development of legal, technological and institutional infrastructure. The regulatory norms with respect to capital adequacy, income recognition, asset classification and provisioning have progressively moved towards convergence with the international best practices. The Basel – II capital adequacy framework is being implemented in a phased manner with effect from March 2008.

We have observed that the Indian banks’ balance sheets have strengthened considerably, financial markets have deepened and widened and, with the introduction of the real time gross settlements (RTGS) system, the payment system has also become robust. Currently, all scheduled commercial banks are compliant with the minimum capital adequacy ratio (CRAR) of 9 per cent. The overall CRAR for all scheduled commercial banks stood at 12.4 per cent at end-March 2006. The gross non-performing assets of scheduled commercial banks has declined from 8.8 per cent of advances at end March 2003 to 3.3 per cent at end March 2006, while the net non-performing assets have declined from 4.0 per cent to 1.2 per cent during the same period.

Financial Markets

Development of financial markets received a strong impetus from financial sector reforms since the early 1990s. The Reserve Bank has been engaged in developing, widening and deepening of money, government securities and foreign exchange markets combined with a robust payments and settlement system. A wide range of regulatory and institutional reforms were introduced in a planned manner over a period to improve the efficiency of these financial markets. These included development of market micro structure, removal of structural bottlenecks, introduction/ diversification of new players/instruments, free pricing of financial assets, relaxation of quantitative restrictions, better regulatory systems, introduction of new technology, improvement in trading infrastructure, clearing and settlement practices and greater transparency. Prudential norms were introduced early in the reform phase, followed by interest rate deregulation. These policies were supplemented by strengthening of institutions, encouraging good market practices, rationalised tax structures and enabling legislative and accounting framework.

II. A Review of Monetary Policy Challenges

The conduct of monetary policy has become more challenging in recent years for a variety of reasons. Many of the challenges the central banks are facing are almost similar which could be summarized as follows:

Challenges with Globalisation

First, globalisation has brought in its train considerable fuzziness in reading underlying macroeconomic and financial developments, obscuring signals from financial prices and clouding the monetary authority’s gauge of the performance of the real economy. The growing importance of assets and asset prices in a globally integrated economy complicates the conduct of monetary policy when it is focused on and equipped to address price stability issues. Second, with the growing integration of financial markets domestically and internationally, there is greater activism in liquidity management with a special focus on the short-end of the market spectrum. There is also a greater sophistication in the conduct of monetary policy and central banks are consistently engaged in refining their technical and managerial skills to deal with the complexities of financial markets. As liquidity management acquires overriding importance, the evolving solvency conditions of financial intermediaries may, on occasions, get obscured in the short run. No doubt, with increasing globalization, there is greater coordination between central banks, fiscal authorities and regulatory bodies governing financial markets. Third, there is considerable difficulty faced by monetary authorities across the world in detecting and measuring inflation, especially inflation expectations. Recent experience in regard to impact of increases in oil prices, and more recently elevated food prices shows that ignoring the structural or permanent elements of what is traditionally treated as shocks may slow down appropriate monetary policy response especially if the focus is on "core inflation". Accounting for house rents/prices in inflation measurement has also gained attention in some countries. The central banks are often concerned with the stability/variability of inflation rather than the level of prices. Inflation processes have become highly unclear and central banks are faced with the need to recognise the importance of inflation perceptions and inflation expectations, as distinct from inflation indicators. In this context, credible communication and creative engagement with the market and economic agents have emerged as a critical channel of monetary transmission.

Challenges For Emerging Market Economies

It is essential to recognize that the international financial markets have differing ways of judging macroeconomic developments in industrial and emerging market economies. Hence, the challenges and policy responses do differ.

First, the EMEs are facing the dilemma of grappling with the inherently volatile increasing capital flows relative to domestic absorptive capacity. Consequently, often the impossible trinity of fixed or managed exchange rates, open capital accounts and discretion in monetary policy has to be managed in what could be termed as ‘fuzzy’ manner rather than satisfactorily resolved - a problem that gets exacerbated due to huge uncertainties in global financial markets and possible consequences in the real sector.

Second, in the emerging scenario of large and uncertain capital flows, the choice of the instruments for sterilization and other policy responses have been constrained by a number of factors such as the openness of the economy, the depth of the domestic bond market, the health of the financial sector, the health of the public finances, the country’s inflationary track record and the perception about the credibility and consistency in macroeconomic policies pursued by the country. Further deepening of financial markets may help in absorption of large capital inflows in the medium term, but it may not give immediate succour at the current stage of financial sector development in many EMEs, particularly when speed and magnitude of flows are very high. Some of the EMEs are also subject to adverse current account shocks in view of elevated commodity prices. Going forward, global uncertainties in financial markets are likely to dominate the concerns of all monetary authorities, but, for the EMEs, the consequences of such macro or financial disturbances could be more serious. Third, the banking sector has been strengthened and non-banking intermediation expanded providing both stability and efficiency to the financial sector in many EMEs. Yet, sometimes, aligning the operations of large financial conglomerates and foreign institutions with local public policy priorities remains a challenge for domestic financial regulators in many EMEs. Further, reaping full benefits of competition in financial sector is somewhat limited in many EMEs. Large players in developed economies compete with each other intensely, while it is possible that a few of them dominate in each of the EME's financial markets. A few of the financial intermediaries could thus wield dominant position in the financial markets of these countries, increasing the concentration risk. While it is extremely difficult to envision how the current disturbances in financial markets will resolve, the focus of many EMEs will be on considering various scenarios and being in readiness with appropriate policy strategies and contingency plans. Among the factors that are carefully monitored, currency markets, liquidity conditions, globally dominant financial intermediaries, impact on real sector through credit channel and asset prices are significant, but the list is certainly not exhaustive.

III. Monetary Policy Framework in India

Objectives

The basic objectives of monetary policy, namely price stability and ensuring credit flow to support growth, have remained unchanged in India, but the underlying operating framework for monetary policy has undergone a significant transformation during the past two decades. The relative emphasis placed on price stability and economic growth is modulated according to the circumstances prevailing at a particular point in time and is clearly spelt out, from time to time, in the policy statements of the Reserve Bank. Of late, considerations of macroeconomic and financial stability have assumed an added importance in view of increasing openness of the Indian economy.

Framework

In India, the broad money (M3) emerged as the nominal anchor from the mid-1980s based on the premise of a stable relationship between money, output and prices. In the late 1990s, in view of ongoing financial openness and increasing evidence of changes in underlying transmission mechanism with interest rates and exchange rates gaining in importance vis-à-vis quantity variables, it was felt that monetary policy exclusively based on the demand function for money could lack precision. The Reserve Bank, therefore, formally adopted a multiple indicator approach in April 1998 whereby interest rates or rates of return in different financial markets along with data on currency, credit, trade, capital flows, fiscal position, inflation, exchange rate, etc., are juxtaposed with the output data for drawing policy perspectives. Such a shift was gradual and a logical outcome of measures taken over the reform period since the early 1990s. The switchover to a multiple indicator approach provided necessary flexibility to respond to changes in domestic and international economic environment and financial market conditions more effectively. Now, liquidity management in the system is carried out through open market operations (OMO) in the form of outright purchases/sales of government securities and daily reverse repo and repo operations under a Liquidity Adjustment Facility (LAF) and repo and reverse repo rates have emerged as the main instruments for interest rate signalling in the Indian economy. The armoury of instruments to manage, in the context of large capital flows and sterilisation, has been strengthened with open market operations through Market Stabilisation Scheme (MSS), which was introduced in April 2004. Under the MSS, the Reserve Bank was allowed to issue government securities as part of liquidity sterilisation operations in the wake of large capital inflows and surplus liquidity conditions. While these issuances do not provide budgetary support, interest costs are borne by the fisc; as far as Government securities market is concerned, these securities are also traded in the secondary market, at par with the other government stock. While the preferred instruments are indirect, and varied, there is no hesitation in taking recourse to direct instruments also, if circumstances so warrant. In fact, complex situations do warrant dynamics of different combination of direct and indirect instruments, in multiple forms, to suit the conditions affecting transmission mechanism. There are occasions when the medium-term goals, say reduction in cash reserve ratios for banks, conflict with short-term compulsions of monetary management requiring actions in both directions. Such operations do warrant attention to appropriate articulation to ensure policy credibility. Drawing a distinction between medium term reform goals and flexibility in short-term management is considered something critical in the current Indian policy environment. Similarly, while there is considerable merit in maintaining a broad distinction between monetary and prudential policies of the central bank, the Reserve Bank did not hesitate, as a complement to monetary tightening, to enhance the provisioning requirements and risk weights for select categories of banking assets, namely real estate, housing and capital market exposures. These measures were needed to specifically address issues of rapidly escalating asset prices and the possible impact on banks’ balance sheets in a bank dominated financial sector. This combination, and more important, readiness of the Reserve Bank to use all instruments, has a credible impact, without undue restraint on growth impulses. Some of the important factors that shaped the changes in monetary policy framework and operating procedures in India during the 1990s were the delinking of budget deficit from its automatic monetization by the Reserve Bank, deregulation of interest rates, and development of the financial markets with reduced segmentation through better linkages and development of appropriate trading, payments and settlement systems along with technological infrastructure. With the enactment of the Fiscal Responsibility and Budget Management Act in 2003, the Reserve Bank has withdrawn from participating in the primary issues of Central Government securities with effect from April 2006. The recent legislative amendments enable a flexible use of the CRR for monetary management, without being constrained by a statutory floor or ceiling on the level of the CRR. The amendments also enable the lowering of the Statutory Liquidity Ratio (SLR) to the levels below the pre-amendment statutory minimum of 25 per cent of net demand and time liabilities of banks – which would further improve the scope for flexible liquidity management.

Institutional Mechanisms

Monetary policy formulation is carried out by the Reserve Bank in a consultative manner. The Monetary Policy Department holds monthly meetings with select major banks and financial institutions, which provide a consultative platform for issues concerning monetary, credit, regulatory and supervisory policies of the Bank. Decisions on day-to-day market operations, including management of liquidity, are taken by a Financial Markets Committee (FMC), which includes senior officials of the Bank responsible for monetary policy and related operations in money, government securities and foreign exchange markets. The Deputy Governor, Executive Director(s) and heads of four departments in charge of monetary policy and related market operations meet every morning as financial markets open for trading. They also meet more than once during a day, if such a need arises. In addition, a Technical Advisory Committee on Money, Foreign Exchange and Government Securities Markets comprising academics and financial market experts, including those from depositories and credit rating agencies, provides support to the consultative process. The Committee meets once a quarter and discusses proposals on instruments and institutional practices relating to financial markets. Besides FMC meetings, Monetary Policy Strategy Meetings take place regularly. The strategy meetings take a relatively medium-term view of the monetary policy and consider key projections and parameters that can affect the stance of the monetary policy. In pursuance of the objective of further strengthening the consultative process in monetary policy, a Technical Advisory Committee (TAC) on Monetary Policy has been set up with Governor as Chairman and Deputy Governor in charge of monetary policy as Vice Chairman, three Deputy Governors, two Members of the Committee of the Central Board and five specialists drawn from the areas of monetary economics, central banking, financial markets and public finance, as Members. The TAC meets ahead of the Annual Policy and the quarterly reviews of annual policy. The TAC reviews macroeconomic and monetary developments and advises on the stance of monetary policy.

IV. Some Issues in the Conduct of Monetary Policy in India

Let me now discuss some issues in the conduct of monetary policy in India, in the current context.

First, one of the major challenges relates to managing the transition of Indian economy to high growth trajectory accompanied by a low and stable inflation and well anchored inflation expectations. There is growing evidence that the upward shift in growth trajectory in India is of enduring nature as it is supported by high saving and investment rates, improved productivity and vast potential lying by way of demographic dividend. However, it is still important for monetary policy formulation to identify the cyclical and structural components of growth achieved in recent years, despite this task being rendered somewhat difficult in an economy that is undergoing a rapid and deep structural transformation. Second, a situation in which the aggregate supply is evidently less elastic domestically imposes an additional burden on monetary policy. While open trade has expanded the supply potential of several economies, significant supply in-elasticities do persist domestically, particularly due to infrastructure constraints. Further, persisting impact of supply shocks on prices of commodities and services, to which headline inflation is sensitive, can therefore exert a lasting impact on inflation expectations. Faced with longer-term structural bottlenecks in supply with less than adequate assurance of timely, convincing and demonstrated resolution of these issues, monetary policy needs to respond appropriately. Third, some categories of interest rates are yet to be fully liberalised in the system, thereby muting at least partly, the impact of monetary policy actions on the structure of interest rates.

Fourth, in the Indian context, it is recognized that monetary policy has to contend with large fiscal deficits and high levels of public debt by international standards. While the recent improvements in the fiscal position of States and significant consolidation in the finances of the Centre provided greater manoeuvrability, monetary policy needs to closely coordinate with cash and debt management of governments in a non-disruptive manner.

Fifth, the operation of monetary policy has to be oriented around the predominantly public sector ownership of most of the banking system which plays a critical role in the transmission of monetary policy to the extent other public policy considerations dominate their overall operations.

Finally, though India is essentially a bank-dominated economy, commercial credit penetration in the Indian economy is still relatively low. Concerns about credit to agriculture and small and medium enterprises usually relate to inadequacy, constraints on timely availability, high cost, neglect of small and marginal farmers, low credit-deposit ratios in several States and continued presence of informal credit markets with high interest rates. It is in this context that the Reserve Bank of India continues to address the need for ensuring financial inclusion of all segments of population, protecting interests of depositors and promoting a conducive credit culture. These considerations invite the attention of the Reserve Bank, even while monetary policy aims at financial stability by moderating excess volatility in financial markets.

V. Concluding Observations

In the current environment, monetary policy in India would continue to be vigilant and pro-active in the context of any accentuation of global uncertainties that pose threats to growth and stability in the domestic economy. The domestic outlook continues to be favorable and would dominate the dynamic setting of monetary policy in the period ahead. It is important to design monetary policy such that it promotes growth by contributing to the maintenance of financial and price stability. Accordingly, while the stance of monetary policy would continue to reinforce the emphasis on price stability and well-anchored inflation expectations and thereby sustain the growth momentum, contextually, financial stability assumes greater importance at the current juncture.

Friends, before concluding, I want to emphasize that several transitions and structural transformation are taking place in the diverse and large society that is India. These encompass social, political, cultural and of course economic factors.

Monetary policy is but one element in the complex web of challenges to public policy and there may be occasions when purely technical responses to monetary policy challenges would be less than appropriate. Public policy, including monetary policy, has to reckon with the complexity of managing these multiple transitions. We are fortunate that we have a supportive and stable political system and well functioning public institutions. We, in the Reserve Bank, are conscious of these complexities and approach issues in a flexible manner with a sense of humility.

Thank you

Greenspan sees turmoil similar to 1987

Former Federal Reserve Chairman Alan Greenspan said the current market turmoil is "identical" in many ways to that which occurred in 1987 and 1998, the Wall Street Journal reported in its online edition on Friday.

"The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987," Greenspan was quoted by the newspaper as saying.

He made the comment on Thursday at an event in Washington organized by the Brookings Papers on Economic Activity, an academic journal, the report said.

Greenspan, now a consultant but who was Fed chairman from 1987 to 2005, said business expansions are driven by euphoria and contractions by fear, the report said.

While economists tend to think the same factors drive expansions and contractions, "the expansion phase of the economy is quite different, and fear as a driver, which is going on today, is far more potent than euphoria," the report said.

Hedge fund Long-Term Capital Management controlled $100 billion of assets in 1998 but collapsed in the wake of a Russian debt crisis, wreaking havoc in many derivatives markets.

Gitanjali Gems launches IT company

Gitanjali Gems, a Rs 1,250 crore jewellery company, today announced its foray in the information technology (IT) sector. The company has floated Ivida Technologies, a wholly owned subsidiary, to launch its software, technology and telecom business.

The subsidiary will be essentially engaged in web development, infrastructure management and enterprise resource planning (ERP). Explaining the rationale behind the move, Sam George, director, Ivida Technologies, said, "The company intends to tap opportunities in the retail boom and the IT sector in general."

He also mentioned that technology will play a key role in Gitanjali’s expansion plans as the company is looking at automating all its retail operations.

Apart from addressing the IT requirements of the group company, the subsidiary will also cater to its independent clients. George said, "The company has bagged some US-based jewellery clients for the web portal operations. We are also in talks with companies to be their enterprise resource planning (ERP) partners in India." He further said that the third area of immediate concern for Ivida would be hardware and networking.

The company is also looking at partnering with solution providers like JDA, SAP and others for specific retail solutions. Subsequently, Ivida also aims to focus on media and graphics and knowledge processing outsourcing operations. Currently, it has a team of 30 people, which would be scaled upto 75 by the end of the first operational year.

Sensex ends down 26pts, ITC gains 2%

The Sensex opened with a positive gap of 39 points at 15,655, and rallied to a high of 15,716 - only 153 points away from its all-time high.

Though the index drifted into negative zone in early deals, the index displayed strength for the major part of the day.

A fresh round of selling in late deals saw the index tumble to a low of 15,565 - down 151 points from the day's high.

The Sensex finally settled with a marginal loss of 26 points at 15,590. The index ended the week with a gain of 272 points.

The BSE Auto and Realty indices were down 1% each at 4890 and 7470, respectively.

The market breadth was marginally positive - out of 2,767 stocks traded, 1,369 advanced, 1,317 declined and 81 were unchanged today.

INDEX MOVERS...

ITC surged nearly 2% to Rs 178. ONGC gained 1.6% at Rs 851. Hindalco moved up 1.3% to Rs 157.

HDFC and HDFC Bank were up around 1% each at Rs 2,130 and Rs 1,196, respectively.

...AND THE SHAKERS

Mahindra & Mahindra and Cipla dropped nearly 2.5% each to Rs 704 and Rs 181, respectively.

Tata Motors slipped over 2% to Rs 697. ACC shed 1.4% at Rs 1,087.

Reliance Energy, Hindustan Unilever, Reliance, Maruti and Ranbaxy were down over 1% each at Rs 850, Rs 214, Rs 1,961, Rs 873 and Rs 410, respectively.

MOST ACTIVE COUNTERS

Aptech topped the value chart with a turnover of Rs 126.50 crore followed by Reliance (Rs 100.70 crore), Welspun Gujarat (Rs 95.15 crore), ONGC (Rs 92 crore) and IFCI (Rs 84.70 crore).

Nagarjuna Fertilisers led the volume chart with trades of around 1.34 crore shares followed by IFCI (1.20 crore), Tata Tele (92.65 lakh), IKF Technologies (91.20 lakh) and Bellary Steel (80.50 lakh)

Sensex slips amid sharp volatile trades

The market saw high volatility during the day as stocks gyrated between either sides of the zones throughout the session with the Sensex witnessing the intra-day swing of 151 points. The market opened higher buoyed by the overnight gains in the US markets, but pared early gains as investors' sentiment turned cautious as the Sensex neared its lifetime high of 15,868 points. Thereafter, sustained selling in frontline, auto and metal stocks saw the Sensex enter into negative territory. After displaying some range-bound moves, the market plunged deep into the red on heavy selling towards the close to touch the day's low of 15,565. The Sensex finally closed the session at 15,590, down 26 points. The Nifty had a flat close at 4510, down nine points.

The breadth of the market was neutral. Of the 2,767 stocks traded on the Bombay Stock Exchange (BSE) 1,318 stocks declined, 1,368 stocks advanced and 81 stocks ended unchanged. Among the sectoral indices the BSE Realty index shed 1.03%, the BSE Auto index declined 0.97% and the BSE Metal index was down 0.67%. However, the BSE FMCG index and the BSE PSU index closed in the green.

Selective buying helped the index overcome its losses. ITC gained 1.83% at Rs178, ONGC advanced 1.63% at Rs851 and Hindalco added 1.29% at Rs157. HDFC, HDFC Bank, Reliance Communications, NTPC, Infosys, Dr reddy's Lab and Grasim notched up steady gains.

Selling was evident in select heavyweights. Mahindra & Mahindra dropped 2.46% at Rs704, Cipla declined 2.35% at Rs180, Tata Motors tumbled 2.15% at Rs697, ACC shed 1.40% at Rs1,087, Reliance Energy dipped 1.16% at Rs850, HUL was down 1.11% at Rs214 and Reliance shed 1.10% at Rs1,961.

Over 1.33 crore Nagarjuna Fertilisers shares changed hands on the BSE followed by IFCI (1.19 crore shares), Tata Teleservices (92.52 lakh shares), IKF Technologies (90.92 lakh shares) and Bella Steel (80.40 lakh shares).

Value wise, Aptech clocked a turnover of Rs126 crore on the BSE followed by Reliance Industries (Rs100 crore), Welspun Gujrat (Rs95 crore), ONGC (Rs92 crore) and IFCI (Rs84 crore).

Market may turn volatile

The market is expected to see a volatile week, as the first meeting of the UPA-Left committee on the Indo-US nuclear deal is likely to take place before 14 September 2007. The meeting date is speculated to be somewhere between 10 to 14 September 2007.

The government had put on hold the operationalisation of the nuclear deal pending the findings of a committee constituted to go into the objections raised by the Left parties.

A lot will also depend on how global markets pan out. Of late, local market have been closely tracking movements in global markets.

Also caution will prevail in the global markets ahead of the US Federal Reserve meeting scheduled to be held on 18 September 2007. Marketmen speculate an interest-rate cut.

Market posted third straight gain for the week ended 7 September 2007. BSE Sensex rose 271.82 points or 1.77% to 15,590.42 while the S&P CNX Nifty rose 45.5 points or 1.01% to 4518.60.

FIIs have been on a buying drive recently. They bought shares worth a net Rs 2191.60 crore in four trading sessions from 3 September 2007 to 6 September 2007. Mutual funds were net buyers worth Rs 353.80 crore in equity market during four trading sessions from 3 September 2007 to 6 September 2007

Market extends gains on resumption of FII buying

Market started the week on firm note after Federal Reserve chairman Ben Bernanke and US president George Bush assured that they would not let the economy to collapse. It extended gains later. BSE Sensex gained in 3 out of the 5 trading sessions.

BSE Sensex rose 271.82 points or 1.77% to 15,590.42 in the week ended 7 September 2007.

The S&P CNX Nifty rose 45.5 points or 1.01% to 4518.60 in the week.

BSE Mid-Cap Index (up 3.68% to 6,851.65), BSE SmallCap index (up 4.63% to 8,433.52) , BSE Auto index (up 0.24% to 4,889.83), Bankex (up 3.01% to 8,095.69), Capital Goods index (up 1.4% to 13,613.24), BSE IT index (up 1.61% to 4,659.70) and BSE Realty index (up 3.16% to 7,470.27) edged higher.

FIIs bought shares worth a net Rs 2191.60 crore in four trading sessions from 3 September 2007 to 6 September 2007. Mutual funds bought shares worth a net Rs 353.80 crore in four trading sessions from 3 September 2007 to 6 September 2007

The BSE Sensex rose 103.45 points or 0.68% at 15,422.05 on Monday, 3 September 2007. In opening trade, the market had pared gains after surging initially. It had opened on a firm note following the rally in US stocks on Friday (31 August 2007) after Federal Reserve’s chairman Ben Bernanke and US president George Bush assured that they would not let the economy to collapse. European and Asian markers were mixed on that day.

The BSE Sensex rose 43.35 points or 0.28% at 15,465.40 on Tuesday, 4 September 2007. The market settled with small gains, amid mixed trend in index pivotals. The market started the day firm but slipped in the negative zone in mid-morning trade on profit booking. It staged recovery from lower level later. The market pared gains towards the close of the trading session. Some volatility was witnessed at higher levels. That was eighth straight session of gains for the market. European and Asian markets were subdued.

The BSE Sensex declined 19.25 points or 0.12% at 15,446.15 on Wednesday, 5 September 2007. Domestic stock markets snapped their eight-day winning streak, as profit booking emerged at higher levels in late trade. The market saw volatile movements towards the later half of the day, in sync with Asian and European markets, which also swung in and out of positive zone. Buying was seen in software, sugar and realty stocks. Selling was witnessed in capital goods and oil & gas stocks.

The BSE Sensex gained 170.16 points to 15,616.31 on Thursday, 6 September 2007. The market scaled higher as buying continued buying throughout the day, except for the odd blip in early trade. Asian markets also rebounded from initial sluggishness while European stocks were trading mixed.

The BSE Sensex lost 25.89 points or 0.17% to 15,590.42 on Friday, 7 Aeptember 2007. The market pared early gains as fresh selling emerged in later half of the day when European markets drifted lower. Earlier, the market had opened on a firm note following overnight gains in US stocks as a series of mixed reports on the US economy raised investors' optimism of an interest-rate cut by the US Federal Reserve in a meeting scheduled to be held on 18 September 2007.

India's top utility vehicle maker, Mahindra & declined 0.66% to 704.35. It said on Monday 3 September 2007 that its vehicle sales rose 30 % to 18,269 units in August 2007 over August 2006.. As per reports, Mahindra & Mahindra is looking to buy a design firm in Italy as part of its plans to expand presence in the automotive space. Reports also suggest that the company is likely to launch its new sports utility vehicle (SUV) Ingenio and hybrid variants of Scorpio next year.

Bajaj Auto declined 0.89% to Rs 2,324.25. Bajaj Auto’s vehicle sales in August fell 6% to 195,707 units from 2,08,163 units a year earlier. It said sales of motorcycles fell 7% to 1,67,483 units from 1,80,570 and sales of all two-wheelers fell 6% to 1,70,203 units from 1,82,013 units a year earlier. The company’s exports jumped 75% to 56,452 units from 32,283 units a year earlier. Meanwhile, as per reports, TVS Motor, India's third-largest motorbike maker, plans to take libel action against Bajaj Auto after the firm accused it of breaching patented rights on engine technology.

Hero Honda Motors rose 2.97% to Rs 667.85. It sold 2,40,875 units in August 2007, up 12% from 2,15,076 units sold in, the same month last year, on the strength of new launches.

Maruti Udyog rose 0.54% to Rs 872.90. On Saturday, 1 September 2007, Maruti Udyog said it sold 65,958 vehicles in August 2007, up 27% from 51,855 vehicles sold in the same month last year. The company sold 60,229 units in the domestic market, up 25% percent from 48,259 units a year earlier. Maruti’s exported 5,739 units, up from 3,596 units last year.

ACC rose 1.96% to Rs 1,086.75. It announced on 3 September 2007 that its cement dispatches jumped 14.59% to 1.57 million tonnes in August 2007 over August 2006. Cement production grew 20.3% to 1.6 million tonnes in August 2007 over August 2006.

India's top bus and truck maker, Tata Motors declined 0.76% to Rs 696.50. Its vehicle sales in August fell 0.4% to 45,144 units from 45,325 units a year earlier. Commercial vehicle sales in the domestic market rose 1.6% to 23,431 units from 23,069 units a year earlier, while sales of cars and utility vehicles fell 5% to 16,620 units. Exports in August 2007 rose 8% to 5,093 units from 4,715 units a year earlier.

Index heavyweight RIL gained 0.1% to Rs 1961.40. It said on 6 August 2007, that it had completed acquisition of IPCL, a move that could help control two-thirds of the country's petrochemical market. Meanwhile, RIL announced on Tuesday, 4 September 2007, the acquisition of a majority stake and management control of Gulf Africa Petroleum Corporation (GAPCO) for an undisclosed amount. The CPI (M) on Tuesday, 4 September 2007, said RIL had proposed an unfair price of $4.33 per million british thermal units (MBTU) for gas to be produced from Krishna-Godavari basin.

TCS (up 1.15% to Rs 1077.30), Reliance Energy (up 9.06% to Rs 850.40), Ranbaxy Labs (up 4.75% to Rs 409.90), Infosys (up 2.9% to Rs 1908.85), HDFC Bank (up 2.07% to Rs 1195.60), HDFC (up 7.8% to Rs 2,130.20) and ICICI Bank (up 3.88% to Rs 919) were the major gainers amongs the Sensex constituents

Securities & Exchange Board of India (Sebi) has withdrawn the recognition granted to the Hyderabad Stock Exchange for its failure to comply with the demutualisation rules under the stipulated time frame. As per the demutualisation requirement, every stock exchange has to ensure that at least 51% of its equity capital is held by the public other than its broking members.

BSE, on Monday, 3 September 2007, decided to add 13 stocks to trade-to-trade segment, to be effective from Friday, 7 September 2007. The stocks being transferred to trade-to-trade segment include Acrow (India), Indokem, Rasoi, Yashraj Securities, Lakshmi Mills Company and Transchem, among others.

Securities and Exchange Board of India (Sebi) on Tuesday, 4 September 2007, refused to renew the recognition of Magadh Stock Exchange (MSE). The grounds for refusal to renew its recognition include failure to appoint an executive director for the exchange, inadequate infrastructure, non-recovery of dues from members and listed companies, and failure to create an investor protection fund trust, among others.

National Stock Exchange (NSE) has decided to extend trading timing by 45 minutes from 25 September 2007 to 9 October 2007 due to loss of satellite connectivity during this period. Trading will close at 11:25 IST and re-open at 12:10 IST. The final closing will be at 16:15 IST, instead of 15:30 IST.

According to data released by the commerce ministry on Monday 3 September 2007, India's exports expanded 18.52% to $ 12.49 billion in July 2007 from $ 10.54 billion in July 2006. In rupee terms, exports moved up 3.10% to Rs 50493.57 crore in July 2007 compared with Rs 48974.77 crore in July 2006.

India's net direct tax receipts expanded 42% to Rs 61030 crore ($ 15 billion) in April-August 2007 over Rs 42980 crore in April-August 2006. Direct tax collection surged because of a healthy corporate performance, buoyancy in the economy, better tax compliance and improved tax administration.

A 15-member United Progressive Alliance (UPA)-Left committee was announced in New Delhi by External Affairs Minister Pranab Mukherjee to address concerns raised by the Communist parties on the Indo-US civil nuclear deal. The committee is expected to hold its first meeting after 9 September 2007

BSE has revised daily circuit filter for a number of stocks effective, 7 September 2007. Following the revision, a total of 376 stocks will attract 10% circuit filter, 346 shares will attract 5% circuit filter and 30 stocks will attract 2% circuit filter.

Inflation dipped to a 16-month low at 3.79% in the week ending 25 August 2007 as against 3.94% in the week ending 18 August 2007. Inflation was at 5.27% in the corresponding week last year. Inflation growth declined because of fall in prices of food articles like fruits and vegetables, maize and fish-marine.

Small-cap, mid-cap shares outperform market

The market pared early gains as fresh selling emerged in later half of the day when European markets drifted lower. Earlier today, the market had opened on a firm note following overnight gains in US stocks as a series of mixed reports on the US economy raised investors' optimism of an interest-rate cut by the US Federal Reserve in a meeting scheduled to be held on 18 September 2007.

India's wholesale price index rose 3.79% per annum in the 12 months to 25 August 2007, lower than the previous week's 3.94% due to a decline in some food prices, government data showed on Friday, 7 September 2007. Inflation is at its lowest level since it touched 3.70% in the week ended April 15, 2006. Inflation data hit the market at about 12:00 IST.

The BSE 30-share Sensex declined 25.89 points or 0.17% at 15,590.42. It had opened higher at 15,655.37 and advanced further to hit a high of 15,716.06. The index had slipped to a low of 15,565.22. It oscillated in a range of 150.84 points in the day.

The S&P CNX Nifty shed 9.10 points or 0.20% at 4509.50. The Nifty September 2007 futures settled at 4480, a discount of 29.50 points as compared to spot closing

The market breadth which was strong throughout the day, eased at the fag end of the day. On BSE, 1,383 shares advanced as compared to 1,381 that declined, while 71 remained unchanged. This is in sharp contrast to a strong market breadth in morning when, 1264 shares advanced as compared to 305 that declined, while 24 remained unchanged.

The BSE Mid-Cap Index rose 0.04% to 6,851.65 while the BSE Small-Cap Index gained 0.45% to 8,433.52. Both these indices outperformed the Sensex

The total turnover on BSE amounted to Rs 4864 crore as compared to Rs 4,670.89 crore on Thursday, 6 September 2007. The NSE’s F&O turnover was Rs 38,666.44 crore as compared to Rs 40927.51 crore on Thursday, 6 September 2007.

Most of the sectoral indices on BSE settled lower. The BSE FMCG Index (up 0.72% at 2,046.63), BSE TecK index (down 0.14% to 3,642.30), and BSE PSU index (up 0.01% to 7,288.49) outperformed the broad market.

However, the BSE Metal Index (down 0.67% at 11,609.08), BSE Bankex (down 0.19% at 8,095.69), BSE Oil and Gas Index (down 0.56% at 8,185.77), BSE Consumer Durables index (down 0.39% to 4,479.70), BSE Realty index (down 1.03% to 7,470.27), BSE Health Care Index (down 0.31% at 3,705.68), BSE Capital Goods Index (down 0.33% at 13,613.24), BSE Auto Index (down 0.97% at 4,889.83) and BSE IT Index (down 0.12% at 4,659.70) were underperformers.

From the 30-member Sensex pack, 20 slipped; the rest gained.

India’s largest cigarette manufacturer by sales ITC surged 1.63% to Rs 177.50 on 17.62 lakh shares. It was the top gainer from the Sensex pack.

Hindalco Industries (up 1.32% to Rs 157), HDFC Bank (up 1.07% to Rs 1198) were the other gainers from the Sensex pack

Oil and Natural Gas Corporation, India's second-most valuable firm, rose 1.56% to Rs 850.10 as oil prices climbed above $76 a barrel as tension between Syria and Israel raised supply concerns.

State Bank of India (SBI), the nation’s largest banking entity by net profit, slipped 0.91% to Rs 1617. As per reports, it will raise about Rs 1500 crore through a bond issue this week. The issue will be part of the bank's Tier II capital. The size of core issue likely to be set at Rs 1000 crore with over subscription option of Rs 500 crore.

Cipla, the country's third largest pharma company by sales, was the top loser from the Sensex pack. It slipped 2.43% to Rs 180.50 on 6.39 lakh shares.

TCS, India’s biggest software exporter by revenue, came off the lower level of Rs 1070.20 after Chief Operating Officer N. Chandrasekaran said the outlook for deals is good and the company sees no adverse impact from the US subprime crisis. The stock was down 0.07% to Rs 1076.20.

ICICI Bank, India’s biggest private sector bank by net profit slipped 1.01% to Rs 911.05. As per reports, it is setting up a $2-billion infrastructure fund.

Auto shares declined on profit booking. Tata Motors (down 1.80% to Rs 699), Bajaj Auto (down 0.26% to Rs 2327), Mahindra & Mahindra (down 2.10% to Rs 707), and Maruti Udyog (down 0.98% to Rs 873.15) edged lower.

India's largest private sector entity by market capitalisation and oil refiner, Reliance Industries (RIL), was down 1.29% to Rs 1957.70 on 5.09 lakh shares as its gas pricing formula from the Krishna-Godavari basin faced oppositon from the CPM politburo and Samajwadi Party. The Union fertiliser minister Ram Vilas Paswan said the price ($ 4.33 per million British thermal unit) sought by RIL for the gas it plans to produce from KG block next year is unrealistic.

Aptech (Rs 126.64 crore), Reliance Industries (Rs 100.67 crore), Welspun Gujarat Stahl Rhoern (Rs 95.05 crore), Oil & Natural Gas Corporation (Rs 91.96 crore), and IFCI (Rs 84.23 crore) were the turnover toppers on BSE.

Among the side counters, Elpro International (up 20% to Rs 241.20), Murali Agro (up 20% to Rs 950.40), Triveni Glass (up 20% to Rs 35.70), Uni Abex Alloys (up 20% to Rs 293.10), Hester Pharma (up 18.97% to Rs 153.95), Roto Pumps (up 18.63% to Rs 73.85), BPL (up 20% to Rs 59.50) and Zuari Industries (up 12.11% to Rs 288) surged.

Saregama India jumped 6.75% to Rs 323. The stock has been on a roll since Sonata Investments acquired 10.58 lakh shares of the company at Rs 260 per share in a block deal on Tuesday, 4 September 2007, on BSE. The stock surged 21% in the previous two trading sessions from Rs 250.10 on 4 September 2007 to Rs 302.60 on 6 September 2007.

Hindoostan Spinning & Weaving Mills jumped 10% at Rs 64.75. It surged 15.60% in the previous three trading sessions from Rs 50.95 on 3 September 2007 to Rs 58.90 on 6 September 2007 on reports that the firm has sold eight acres of its defunct mill located near the Siddhivinayak temple at Prabhadevi, Mumbai, for Rs 350 crore to Mumbai-based builder Akruti Nirman.

Eveready Industries India rose 2.72% to Rs 54.75 on pricing equity warrants issue at an 8.81% premium to Thursday, 6 September 2007's closing price of Rs 53.30. The warrant holder will have an option to apply for one equity share of Rs 5 each at a premium of Rs 53 per share.

Tata Power Company was down 1.76% to Rs 716. As per reports, Tata Power plans to pick up a 15% stake in a new spot power exchange being planned by the leading commodity exchange National Commodity and Derivatives Exchange (NCDEX) and National Thermal Power Corporation (NTPC).

DLF was down 2.20% to Rs 621.25. As per reports, DLF plans to spin off its multiplex unit, DT Cinemas, into a separate company that will raise money through an initial public offering (IPO) in the next two years after adding more screens. DT Cinemas, fully owned by DLF, plans to invest Rs 1500 crore over two years to take its total number of screens to 500 in 100 multiplexes from seven in two currently.

Indraprastha Medical slumped 3.95%to Rs 34 after it turned ex-dividend, for a dividend of Rs 1.25 per share from today. It has face value of Rs 10 each.

Federal-Mogul Goetze (India) declined 2.94% to Rs 165 after it fixed 24 September 2007 as the record date for the purpose of rights issue.

Infomedia India surged 6.26% to Rs 272.50, despite denying PE firms picking up ICICI Venture’s stake in the company. A newspaper report on Thursday, 6 September 2007, said private equity funds General Atlantic, Blackstone and Warburg Pincus had shown interest in acquiring ICICI Venture’ 63% stake in Infomedia (formerly Tata Infomedia).

Sintex Industries slipped from the day’s high of Rs 340. It closed 1.30% down at Rs 325. It acquired automotive products business of Mumbai-based Bright Brothers in an all-cash transaction for Rs 149 crore. Sintex will acquire ownership of Bright Brothers’ all five automotive component manufacturing plants located in close proximity to major automobile production hubs like Chennai, Sohna, Pune, Pithampur and Nashik.

Rajesh Exports moved up 0.91% to Rs 651.85. The company said during trading hours on Friday, 7 September 2007, its board would meet on 17 September 2007 to consider increasing the investment ceiling for overseas investors' in the company.

Pump maker Kirloskar Brothers rose 6% to Rs 488 after it said after trading hours on Thursday, 6 September 2007, one of its joint ventures had received a 761-crore order for a canal project from the government of Andhra Pradesh. Kirloskar Brothers' share of the contract is worth Rs 114 crore

GMR Infrastructure lost 4.44% to Rs 775.70 after the National Stock Exchange banned fresh derivatives contracts effective today, 7 September 2007, as the open interest had crossed the 95% limit.

South Indian Bank climbed up 6.05% to Rs 168.45. A large block deal of 10.01 lakh shares was executed in the stock on BSE in early trade at Rs 162.50.

European markets, which opened after the Indian markets, were trading mixed. Key benchmark indices in Germany (down 0.46% to 7,586.39) and France (down 0.59% to 5,543.44) slipped. United Kingdom’s FTSE 100 rose 0.08% to 6,318.40.

Asian markets settled mixed today, 7 September 2007. Japan's Nikkei (down 0.83% at 16,122.16), Hang Seng (down 0.28% at 23,982.61), South Korea's Seoul Composite (down 0.21% at 1,884.90) and Shanghai Composite (down 2.16% to 5,277.15) slipped.

However, Taiwan Weighted (up 0.01% at 9,018.08) and Singapore's Straits Times (up 0.66% at 3,489.08) advanced.

The Dow Jones industrial average rose 57.88 points, or 0.44%, to 13,363.35, on Thursday, 6 September 2007. Broader stock indicators also lifted. The Standard & Poor's 500 index gained 6.26 points, or 0.43%, to 1,478.55, and the Nasdaq Composite index was up 8.37 points, or 0.32%, to 2,614.32.

In a meeting held yesterday, 6 September 2007, Bank of England kept interest rates unchanged at 5.75% and the European Central Bank (ECB) also decided to keep its rates unchanged to 4%.

Crude oil prices climbed further above $76 a barrel on Friday, 7 September 2007, just about $2 below record highs, as tension between Syria and Israel compounded supply worries after fall in US crude and gasoline inventories. US crude gained 18 cents to $76.48 a barrel while London Brent crude edged up 3 cents to $74.80.

Trading Calls

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Buy Alchemist with stop loss of Rs 107 for target of Rs 150.

Buy NIIT with stop loss of Rs 133 for targets of Rs 170 and Rs 225.


Buy Subhash Projects with stop loss of Rs 255 for short-term target of Rs 295.

Pre Open Market Commentary

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Indian market is likely to have a positive opening as the US market closed higher. On Thursday, the Indian markets ended on a positive note, as BSE Sensex closed higher by 170.16 points at 15,616.31 while Nifty grew by 37.35 points to close at 4,518.60. We expect the market to remain range bound during the trading session.

On Thursday, the US market closed in green. The Dow Jones Industrial Average advanced by 57.88 points to close at 13,363.35. The Nasdaq Composite Index grew by 8.37 points to close at 2,614.32. The S&P 500 index increased by 6.26 points to close at 1,478.55.

Indian ADRs ended in positive territory. In technology sector, Infosys grew by (2.38%) along with Wipro by (0.56%) and Satyam by (0.24%) while Patni computers slipped by (1.08%). In banking sector, HDFC bank and ICICI bank grew by (3.23%) and (1.42%) respectively. VSNL and MTNL closed higher by (3.96%) and (3%) respectively.

The major stock markets in Asia are trading mixed. Japan''s Nikkei trading lower by 100.42 points to trade at 16,156.58. Hang Seng slipped by 56.80 points to trade at 23,993.60. Taiwan weighted advanced by 41.37 points to trade at 9,058.45. Singapore Strait times trading higher by 25.16 points at 3,491.22.

Today, Nifty has support at 4,480 and resistance at 4,590 and BSE Sensex has support at 15,520 and resistance at 15,870.

Market Update

US markets were POSITIVE & Asian markets are trading MIXED.
Levels for NIFTY - support at 4500-4480-4460 & resistance at 4540-4565-4585.

Bias for markets is Positive for the day… possible support at 4500 & resistance at 4538.

Stocks with +ve bias: IDFC , India Cement, Steel Stocks (TISCO & Sail), Wipro & IT stocks

Stocks for Short-term delivery: TTML, NIIT Tech

Stocks for Investments: Bajaj Auto, JP Associates

Grey Market - Kaveri Seeds, Power Grid, Dhanus Tech

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Motilal Oswal 825 115 to 120

Power Grid Corporation 44 to 52 12 to 13 (Buyer)

Dhanus Tech. 280 to 295 100 to 105

Kaveri Seeds 150 to 170 28 to 30

Indowind Energy 55 to 65 Discount

Magnum Venture 27 to 30 1.50 to 2.00

Allied Computer 12 2 to 3

Morning Call

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Market Grape Wine :

In House :

Nifty at a supp of 4498 and 4470 levels with resistance at 4535 and 4571 levels .

Buy : Intraday : JpAsso above 925 target 940 s/l of 917

Buy : Intraday : BEML above 1231 target 1267 s/l of 1218

Buy : Intraday : in F&O KTK Bnak above 197.5 target 204 s/l of 193

Buy : Intraday : in F&O IDFC above 133.65 target of 140 s/l of 130

Buy : Positional : Medium term EKC with 50% upside from current levels .

Out House :

Markets at a support of 15353 & 15432 levels with resistance at 15786 & 15818 levels .

Buy : REL & NTPC

Buy : RIL & RPL

Buy : Siemens & Titan

Buy : Centextile, Grasim & Indiacement

Buy : BajaAuto & M&M & Maruti

Buy : JpHydro , IDBI , IFCI , TTML & Nagarfert

Buy : Tisco bullet

Buy : IOlBroad & Aban bullet

Dark Horse : RIL , REL, Aban ,Tisco ,IOLBroad, NTPC , SBIN & Centextile

TGIF : Thank God Its Friday : Markets nearing all time high book profits at higher levels .

Market may extend gains

The market may head higher following overnight gain in US stocks as a series of mixed reports on the US economy made investors more optimistic about the chances for an interest rate cut by the US Federal Reserve. Asian markets were trading mixed today, 7 September 2007. In a meeting held yesterday evening, 6 September 2007, Bank of England kept interest rates unchanged at 5.75% and the European Central Bank (ECB) also decided to keep its rates unchanged to 4%.

Annual inflation data for the week ending 25 August 2007 is due by afternoon today, 7 September 2007. Inflation dipped to 3.94% in the week ending 18 August 2007 as against 4.10% in the week ending 11 August 2007.

Asian markets were trading mixed today, 7 September 2007. Japan's Nikkei (down 0.62% at 16,156.58), Hang Seng (down 0.24% at 23,993.60) and Shanghai Composite (down 0.93% to 5,343.61) slipped.

However, South Korea's Seoul Composite (up 0.04% at 1,889.86) Taiwan Weighted (up 0.64% at 9,074.65) and Singapore's Straits Times (up 0.73% at 3,491.22) advanced.

The Dow Jones industrial average rose 57.88 points, or 0.44%, to 13,363.35, on Thursday, 6 September 2007. Broader stock indicators also lifted. The Standard & Poor's 500 index rose 6.26 points, or 0.43%, to 1,478.55, and the Nasdaq Composite index rose 8.37 points, or 0.32%, to 2,614.32.

Crude oil prices climbed further above $76 a barrel on Friday, 7 September 2007, just about $2 below record highs, as tension between Syria and Israel compounded supply worries after fall in US crude and gasoline inventories. US crude gained 18 cents to $76.48 a barrel while London Brent crude edged up 3 cents to $74.80.

As per provisional data, foreign institutional investors (FIIs) purchased shares worth a net Rs 311.37 crore, while domestic institutional investors (DIIs) were net sellers of shares worth Rs 8.26 crore on Thursday, 6 September 2007.

The BSE 30-share Sensex rose 170.16 points or 1.10% at 15,616.31 on Thursday, 6 September 2007. The S&P CNX Nifty was up 42.75 points or 0.96% at 4,518.60, on that day.

Sensex is now just 252.54 points away from its all time high of 15,868.85 hit on 24 July 2007.

US stocks witness modest rally

Mixed economic data help stocks to end higher after volatile session

Investors digested mixed economic data and US stocks closed modestly higher today, Thursday, 6 September, 2007. Of the nine sectors finishing in positive territory, utilities turned in the best performance followed by the materials sector. The financial sector was the only sector that failed to participate in today's recovery.

Federal Reserve again added $31.25 bln of temporary reserves to banking system in three installments. But U.S commercial paper market shrinking for 4th week and another report from Mortage Bankers Association related to subprime issues led to some volatility in stocks.

The Dow Jones industrial Average closed higher by 57.88 points at 13,363.35. The Nasdaq Composite Index, finished up by 8.37 points at 2,614.32. S&P 500 finished up by 6.26 points at 1,478.55.

Twenty-two out of thirty Dow stocks ended in green today. United Technologies, Honeywell, Merck, CoCo Cola and 3M led the group of Dow winners. Home-Depot, AIG, Altria, Citigroup and Du Pont led the group of Dow laggards.

Merck shares were today up by more than 2% after the company won a case before the New Jersey Supreme Court. The court reversed a lower-court ruling that had granted nationwide class-action status to insurers seeking reimbursement for past spending on Merck's arthritis drug Vioxx.

Wal-Mart, Target reports encouraging same-store sales data

Stocks got a good boost right out of the gate in the morning after Wal-Mart reported better than expected August same-store sales growth of 3.1%. Target too said same-store sales rose 6.1% during the month. The report garnered notable attention mainly after Costco, yesterday, reported drop in same store sales for August.

The Institute for Supply Management index for August was released today. The ISM employment index dropped to 47.9% from 51.7%, the lowest since February 2003 and the first decline in hiring since July 2004. Only three of 18 industries were hiring; eight industries were reducing their workforce.

But the survey said that despite the caution in hiring, most firms were growing at a steady pace in August, with strong gains in new orders. The ISM non-manufacturing (service) index was unchanged at 55.8% in August, slightly stronger than the 55.0% expected.

Indian ADRs close mixed

The Labour Department reported today that the number of U.S. workers applying for jobless benefits saw its biggest drop last week since April. The first-time claims for state unemployment benefits fell by 19,000 to 318,000 for the week ending 1 Sept, the first such drop after five straight weeks of increases.

Top of the hour, the Mortgage Bankers Association said that quarterly foreclosures rose to their third consecutive record high during the second quarter. The same also affected the Financial sector today.

Indian ADRs closed mixed today. VSNL and HDFC Bank were the two top most gainers gaining 3.9% and 3.2% respectively. MTNL and Tata Motors followed them with gains of 3% and 2.8% respectively.

Crude crosses $77 during intra day trading

Crude oil future prices rose today after the weekly Energy Department report showed that U.S. oil and gasoline inventories declined more than expected last week. Renewed violence in the Middle East also contributed support to oil prices.

For the day ending Monday, 6 September, 2007, crude-oil futures for light sweet crude for October delivery closed at $76.3/barrel (higher by $0.57/barrel or 0.75%) on the New York Mercantile Exchange. The contract had touched $77.23 ahead of the supply data's release. Prices are up 13% from a year ago.

Over 1.2 billion shares were traded on the New York Stock Exchange, with advancing stocks outpacing decliners 5 to 3. At the Nasdaq, more than 1.8 billion shares exchanged hands and advancers beat decliners 4 to 3.

For tomorrow, traders’ attention will be focused on economic data to help set the tone of trading. The Labor Dept. will release its August employment report at 8:30 ET. Also garnering attention will be July Wholesale Inventories, which is expected to hit the wires at 10:00 ET.

Daily Call - Sep 7 2007

Daily Call - Sep 7 2007

Wipro

Wipro

Daily Technical note - Sep 7 2007

Daily Technical note - Sep 7 2007

Upmove may continue

After crossing the psychological 15600 level in yesterday's trades and the market is likely to continue its northbound journey as buying interest continues in almost all the sectoral counters. Firm overnight US markets and FIIs remaining net buyers in equities may augur well for the market. However, mix Asian cues and intra-day volatility remains the major concern. Among the key local indices, the Nifty could test higher levels around 4540 and has supports at 4420. The Sensex has a likely support at 14900 and may face resistance at 15850.

US Indices rose on Thursday ahead of Friday's big monthly jobs report. While the Dow Jones scaled up 58 points at 13363, the Nasdaq ended eight points higher at 2614.

Indian floats, too, were upbeat on strong domestic and US markets. Barring Patni Computers and Rediff other Indian ADRs ended at higher levels. VSNL led the upmove and surged 3.96% while Satyam, HDFC Bank, MTNL, VSNL, Infosys, Dr Reddy's Lab and ICICI Bank gained over 1-3% each.

Global crude oil prices moved up marginally, with the Nymex light crude oil for October series rising by 57 cents at $76.30 per barrel. In the commodity space, the Comex gold for December delivery flared up $13.90 to settle at $704.60 a troy ounce.

Dhanus Technologies IPO

Chennai-based Dhanus Technologies (Dhanus), promoted by A.D. Sudhindra,V. Narayanaswamy, Capt. D.S. Srinivasan, offers telecommunication services and unified messaging and enhanced logistics services. The company gets outsourcing (BPO) contracts for telemarketing services from the US, UK and Australia markets.

Dhanus operates in three segments: Telecards: World’s Calling Cards; Teleservices/ITES/BPO Services; and Telematics: FleeTrac service.

Telecards, i.e., V-Tel World’s Calling Cards is offered to Indians traveling abroad. The card is valid in more than 210 countries and allows web-based viewing of call data records (CDRs), and recharge by credit card. It includes web-based calling, SMS-based call back (wherever legal) and web-based call back (wherever legal). Dhanus launched its global prepaid calling cards in June 2004 and since then been very successful in building up an extensive network of dealers, agencies and direct marketing associates across India, South-East Asia and West Asia. The company has also become Airtel’s distributor for its SIM cards for the whole world excluding India and Dubai.

The BPO services were started in 2006 by acquiring business along with assets and liabilities. The BPO operations have 85 seats working three shifts and are to be expanded in stages to 500 by end 2007. The software development revolves around Internet protocol (IP) telephony, Interactive Voice Response (IVR) applications, Customer Relationship Management (CRM) applications and web-based business process applications.

FleeTrac is an integrated tracking, communication, monitoring and enterprise management product for vehicle owners. FleeTrac uses the GPS system for vehicle location. The location information along with other data are conveyed to Dhanus’ central data centre in Chennai through Internet via General Packet Radio Service (GPRS) service.

Dhanus has two subsidiaries. The loss-making Dhanus Technologies Inc., US, has acquired Mpingi Inc., US, which launched voice-over-Internet-protocol (VoIP) service in the US. The second is the profitable Dhanus Global Medicare engaged in the provision and sales of medical equipments and services.

The net proceeds of the issue will be utilised for acquiring and setting up corporate office, network operating centre and infrastructure for the BPO and FleeTrac services.

Strengths

• There has been a dramatic growth in Indians travelling abroad, and their number is estimated to reach around 35 million passengers by 2010. Has sold over 1.68 lakh global calling cards in the year ending March 2005 (FY 2005), 2.25 lakh cards in FY 2006 and, 4.68 lakh cards in FY 2007, and 8.62 lakh cards in all till end June 2007. Has a VoIP-based phone service targeting Indians in the US. The market for this service is also growing.

Has received registration for setting up a vehicle tracking system using vehicle mounted unit (VMU) with an in-built SIM card with GPRS capability to work on global positioning satellites (GPS) from the Department of Telecommunications, Ministry of Communications & Information Technology, government of India. Has also tied up with Airtel to provide GPRS service, which is operational. The Delhi office has started marketing the service.

Weaknesses

• Is yet to receive no-objection certificate (NOC)/license from the Department of Telecommunications for selling international calling cards in India. Also, the track record of the companies with which the directors have been associated is not encouraging. One of the independent directors has a criminal proceeding against him. Apart from this, there are a number of legal proceedings against the company.

• Does not have its own telecom infrastructure in countries where its global calling cards are operational. Thus, it is totally reliant on the infrastructure of the telecom operators in those countries.

• Calling card is not a high-tech business and is highly competitive.

• Although, FleeTrac services has growth potential in India given its usage in transportation, courier, security, police, defense, logistics and supply chain management; the concept of vehicle tracking service is in the introduction stage in the country. Its acceptability and success are yet to be tested. Moreover, the technology used for FleeTrac service is universally available. Thus, there is possibility of new entrants and increasing competition.

• Profit margin is falling. On a standalone basis, telecom service’s profit before interest and tax (PBIT) margin dipped 580 basis points (bps) to 19% in the year ending March 2007 (FY 2007) with sales contributing 56% of revenue. Software service had a PBIT margin of 47.4% in FY 2007, down from 66.1% in FY 2006. Contribution to total revenue was 35%. The BPO services contributed 9% to the total revenue in FY 2007, with PBIT margin down from 71.1% in FY 2006 to 61.8% in FY 2007.

Valuation

At the price band of Rs 280-Rs 295, FY2007 consolidated EPS on post-issue equity works out to Rs 12.4 and P/E o 22.7-23.9. On a standalone basis, EPS on post-issue equity is Rs 13.7 and P/E 20.4-21.5. There is no comparable listed player. The company’s track record of fast growth is a plus for the company.

Kaveri Seeds IPO

Kaveri Seeds produces, processes and markets high quality hybrid seeds for crops like corn, sunflower, cotton, paddy, and grain sorghum. Located in Andhra Pradesh, the company is one of the few recognised agri-input companies in India. The company has production, processing and R & D facilities in Andhra Pradesh and Karnataka. Its R&D mainly focuses on developing superior hybrids in different crops like corn, cotton, sunflower, paddy, and bajra. All the seed varieties developed are marketed under the brand, Kaveri Seeds.

Kaveri Agriteck, a partnership, was acquired by Kaveri Seeds for Rs 50 lakh in September 2006. Kaveri Agriteck was a venture floated to manufacture micronutrients and bio-products.

Kaveri Seeds has four seed processing plants with 11 processing lines in Andhra Pradesh and Karnataka. The company has a combined processing capacity of 18,000 tonnes per annum. It also has a cob drying plant (to improve the germination, vigour and viability of the corn seed and, in turn, improve the yield of the crop) at two different locations in Andhra Pradesh.

The R&D facilities of Kaveri Seeds are at six different locations in Andhra Pradesh. The one in the Ranga Reddy district of Andhra Pradesh is recognised by the Department of Science & Technology, government of India. The R&D infrastructure includes 273 acres of farmland and state-of-the-art lab facility. About 187 acres of it are owned by the company. The rest are on lease. This protects its germplasm and related operations against any misuse and biopiracy. Fifty-five employees including 13 scientists are engaged in full-fledged research.

The extensive network of loyal and committed distributors and dealers in Karnataka, Tamilnadu, Maharashtra and Andhra Pradesh include 736 distributors and 3,500 dealers across southern India.

Kaveri Seeds intends to aggressively expand its operation to other states to have a pan-India presence. The company intends to finance its Rs 63-crore expansion plan from the proceeds of the public issue. The expansion includes acquiring farmland for R&D, setting up a marketing network in north India, establishing corn-cob drying and seed-processing plants apart from a biotechnology laboratory. The expansion is scheduled to begin in October 2007 and complete by May 2008 in a phased manner. Besides, it also wants to upgrade its existing facilities by November 2008.

Strengths

1. Geographical expansion plans in north and east will result in volume-led growth.
2. Moving up the value chain by introducing better quality products yielding high margin. Reduced dependence on outsourced production of foundation seed has resulted in substantial expansion of operating margin in the year ending March 2007 (FY 2007).

Weaknesses

1. Mainly dependent on two crops – corn and sunflower – which contributed over 68% of the revenue in FY 2007. Similarly, has strong presence only in four states:. Andhra Pradesh, Karnataka, Tamil Nadu and Maharashtra.
2. Operates in the agri-inputs industry, which faces risks related to weather, pests and diseases.
3. The Indian seeds industry is highly competitive with a number of Indian as well as MNC players.
4. Has witnessed continuous reduction in debtors’ turnover due to rising credit periods. The debtors’ turnover has come down from 5.1 times in FY 2003 to 3.67 in FY 2007.

Valuation

Kaveri Seeds has set a price band of Rs 150 to Rs 170 per equity share of Rs 10 each, translating into a PE of 19.5x on the lower price band and 22.1x on the higher side of the price band, according to EPS for FY 2007 on post-issue equity of Rs. 13.70 crore.

Monsanto India, the listed Indian subsidiary of Monsanto, US, which also sells hybrid seeds and genetically modified seeds to Indian farmers is presently trading at PE of 22x based on FY 2007 EPS.

Another hybrid seeds player J.K Agro Genetics is currently trading at PE multiple of 13x based on FY 2007 EPS.

The seeds industry is not a high-growth industry as its operations are sensitive to agro-climatic factors and unpredictable fluctuations. Moreover, Kaveri Seeds has shown substantial profit only in FY 2007 and its plans to enter the northern markets will take time to bear fruits.

In view of these factors, the asking P/E of around 20 looks high.