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War Clouds Loom Large

Continued tensions in the Middle East--with no visible solution in sight--saw stock markets tumble. While markets did not rally in the pre-Budget period, the post-Budget scenario is no better.

Even a market-friendly Budget—both dividend tax and long-term capital gains tax have been abolished—couldn't enthuse stock markets this week. The BSE Sensex as well as the S&P CNX Nifty fell on all trading days. Over the week, the Sensex lost 4 per cent and the Nifty was down 4.4 per cent. Mid-cap stocks also took a hit and the S&P CNX Mid-Cap Index shed 4.7 per cent. On the whole, share prices fell across-the-board and the broader market, as represented by the S&P CNX 500, fell by 4.2 per cent.

Globally too, the scene was similar. The Nasdaq was down 2.4 per cent and the Dow Jones lost 1.9 per cent. And the credit for this gloomy scenario across markets went to escalating tensions in the Gulf region and missile testing by North Korea.

The biggest casualty in Indian stock markets was IT stocks. The BSE IT shed a massive 7.1 per over the week as IT majors got hammered. While Infosys and Wipro lost 6.1 per cent and 6.8 per cent, respectively, Satyam was down 8.8 per cent. The news that more states in the US are looking to block projects outsourced to India hurt sentiment. FMCG majors Hindustan Lever and ITC also lost ground pulling the FMCG index down by 2.4 per cent. The least hurt of all the sectors was pharma. The BSE Healthcare Index lost a modest 0.85 per cent. This was largely due to gains posted by pharma major, Ranbaxy. The stock gained 2.5 per cent over the week.

The market turned somewhat jittery on the news that the SEBI may curb FII investment through the route of participatory note. Participatory notes are instruments issued by brokers to FIIs for buying and selling Indian equities. Hence, such a move could affect FII inflows. Also, a possible 500 per cent rise in stamp duty on equity transactions in Maharashtra can hit broking activity in Mumbai.

Among institutional players, mutual funds had bought nearly Rs 11.5 crore worth of equities by Thursday. FIIs too bought Rs 148 crore worth of equities during the week. This was largely due to Rs 174-crore inflows on Monday, the first trading day post-Budget. But FIIs succumbed to selling pressure later in the week.

Outlook
Russia, France and China continue to oppose the US over Iraq in the UN Security Council. However, the US continues to press with its agenda of going to war with Iraq. With reports that the US will push for a vote in the Security Council it appears that war is imminent. The outlook thus remains negative.