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Markets on a High

Good FII inflows and signs of higher economic growth propelled the BSE Sensex beyond the 4350-level. The week also marked the transformation of its benchmark BSE Sensex into a free-float index.

In a high trading week, Indian equities made smart gains. All sectors participated in the rally. While the BSE Sensex, which became a free-float index this week, gained 2.93 per cent, the broader S&P CNX 500 Index surged 2.46 per cent over the week. The week began with PSU, cement and bank stocks driving the markets, with technology stocks joining in later. The BSE IT Index gained 11 per cent this week.

The rally was well supported by robust FII inflows of Rs 845.5 crore till Thursday. FIIs have been investing heavily in the Indian markets due to good economic prospects. With a good monsoon this year, the central bank expects growth to exceed 6 per cent in the current financial year 2003-04, against last year's 4.3 per cent growth.

Thought the market is on a rise for the seventh straight week, the overall market breadth seems to have turned negative. For instance, the advance decline ratio at BSE remained below 0.82 in the last four trading sessions. This indicates that the number of stocks contributing to the upward market movement has declined this week. But the most encouraging thing about the market was the sustained high trading volume. The combined daily average trading volume at BSE and NSE fell from Rs 7,215 crore in previous week to Rs 6,918 crore this week.

The expectation of good economic growth has boosted investors' confidence in index heavyweights. The stock prices of Reliance and Hindustan Lever rose 5.23 per cent and 4.91 per cent this week respectively. Since HLL has the highest weightage in the BSE FMCG Index, the index gained 2.26 per cent over the week.

Cement, bank and select PSU stocks made good gains in the early part of the week. Cement stocks like ACC, Grasim and L&T rose 2-5 per cent on Monday as the sector recorded better sales in August. Bank stocks also gained on the first two trading sessions after Standard and Poor's raised the outlook for the Indian banking sector to stable from negative, citing structural reforms. But both sectors fell later in the week due to profit booking. The BSE Bankex ended the week almost flat. The PSU Index gained due to sharp rise in stock prices of ONGC and GAIL in the first few days. ONGC gained 6.36 per cent and GAIL rose 8.18 per cent over the week.

However, it was a bad week for disinvestment candidate Hindustan Petroleum. Its stock price fell the most (4.48 per cent) among the Nifty stocks. This was on account of the Supreme Court reserving the order on sell-off of HPCL and BPCL. The court has set no date for the final ruling on the Oil Sector Officer's Association's petition challenging the privatisation of the refiner, which says a company nationalised by the parliament can be privatised only by parliament.

In the last two trading sessions, the major activity was centered around technology stocks as the BSE IT Index gained 9 per cent. Over the week, the index was up 11 per cent. The tech sector, which had fallen out of favour in the past few months due to falling profit margins, is back in the limelight due to early signs of an economic recovery in the US. The major gainers of the week include Wipro (17.06 per cent), HCL Technologies (15.19 per cent) and Satyam Computer (11.43 per cent).

As part of the risk containment measure, the BSE has imposed additional margin of 10 per cent in 16 volatile stocks. These include SAIL, Tata Steel, SBI and Divi's Lab. In most these stocks, there has been a sharp rise in prices together with higher volumes. The margins are collected by stock exchanges to protect the clearing house, which is responsible for the settlement process on the bourses. Currently, every scrip in the A and B group attracts a total margin of close to 25 per cent of the gross exposure.

Outlook
The market is at a 30-month high now and is getting heated day after day. As far as FIIs continue to pour money in the market, the rally is expected to continue. The expectation of good economic growth has further extended the rally. However, intermittent profit booking or correction cannot be ruled out in the coming weeks.