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Stinking System Gets a Remedy

The quarterly numbers have brought a whiff of fresh air but can the momentum be sustained?

The pendulum swung back in the bull territory this week with India Inc dishing out impressive first quarter results. The growth numbers were especially inspiring in the backdrop of an economic slowdown and fears of an impending recession. There was more good news in store as Dr Reddy's made a foray into the US generic market.

The inspiring performance ensured that the markets survived Prime Minister's offer to resign over the UTI imbroglio. The sentiment was also buoyed by the tepid response to US-64 repurchase offer, which commenced on August 1. Heavy redemption could translate into a selling pressure since UTI has pledged its bluechip holdings with banks to mobilise Rs 3,000 crore. Thus, barring Wednesday, the bellwether Sensex ended in positive territory and ended the week with a gain of 74 points. FIIs opened their August innings with a bang, pumping in Rs Rs 152 crore in the first 3 trading sessions. The trading volumes have also stablised with the average combined turnover well over Rs 2,000 crore.

It was a good show by the Indian corporate sector and reversed the lacklustre trend of the earlier weeks. While Reliance Industries again surprised the market with a 14% growth in bottomline, Gujarat Ambuja's net surged ahead by 48% to Rs 77 crore. While Dr Reddy's first quarter profits zoomed by 115%, the launch of its capsules in the US generic market added to the charm. The week saw the final commoditisation of the celluloid - while Zee was up on success of "Gadar", Mukta Arts' was beaten down on poor response to "Yaadein".

While domestic bourses were fairly positive, it was a volatile week for US equities as an early rally was cut short due to a weak job report and poor outlook on corporate earnings. Still, the Nasdaq ended the week higher by 36 points while Dow Jones climbed 96 points. Although the six rate cuts in the current year have failed to make the desired impact, the reports indicate the pace of deterioration is slowing. For instance, the unemployment rate, which was expected to rise to 4.7%, remained at 4.5% in July. Yet, the numbers are probably still weak enough to usher in another interest rate cut by the Federal Reserve next month. This could mean another short rally as players anticipate the quantum of rate cut.

Outlook
The UTI crisis seems to be subsiding with government reining in its allies even as opposition attack lacks sting. While the quarterly numbers have brought a whiff of fresh air, it remains to be seen whether the momentum can be sustained. The markets have been amazingly resilient so far despite a flurry of scams hitting the headlines with the Sensex losing a little over 16% in the current calendar. That the markets have stayed relatively stable is attributed to the strong FII inflows, which have pumped in over Rs 12,000 crore in the last seven months. While FIIs continue to be net investors, there has been an appreciable decline in the quantum in recent months. The net investments are down from an average Rs 1800 crore in February-March to only Rs 720 crore in July.

Thus, it is imperative that the government takes urgent steps to restore investor confidence in the markets. While FIIs have been bullish, their inflows should not be taken for granted. Instead of "resignation" threats, the government should get down to serious business, starting with the cleaning up of messy public financial institutions. For, if we now lose sight of real objective amidst the din of accusations, another scam could just be the "last straw that broke the camel's back".