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Correction Sets In

The much-anticipated correction has finally happened. The government's refusal to take a decision on increasing FDI investment limits in the telecom sector and curbs on the use of participatory notes were the key triggers.

After recording gains for seven consecutive weeks Indian equities entered a corrective mode. Markets lost towards the start as well as the end of the week as investors preferred to book gains. The BSE Sensex shed 2.83 per cent (173.59 points) to close the week at 5946.19 points. The S&P CNX Nifty was hit harder losing 3.4 per cent (66.90 points) to close at 1904.65 points. The pain was shared all round with the CNX Midcap 200 shedding 3.14 per cent, while the broader S&P CNX 500 lost 4.63 per cent.

FII participation also slowed down and the net inflow of Rs 544 crore was less than half of that in previous week. Trading activity was also on the lower side as compared to the previous week. Average daily volumes fell by eight per cent to Rs 9460.92 crore. Except for Thursday, declining issues lead advancing ones across both exchanges.

The week started on a weak note with HLL, Reliance and ONGC losing 1.4 per cent, 2.9 per cent and 5 per cent respectively. This dragged the Sensex down by nearly a per cent. All sectoral indices except the BSE Bankex, closed at lower levels. This weakness was to resurface at the end of the week with greater vigour, driving all sectoral indices into negative territory.

But there was some good news the very next day. The Index of Industrial Production (IIP) grew 7.4 per cent in November 2003. This was the highest year-on-year growth seen in any month of the current fiscal. The 'feel-good factor' was back in the markets and the losses of Monday were wiped out. The charge was led by Reliance Industries (up 3 per cent) as investors reacted positively to its acquisition of Flag Telecom. By Wednesday both the Sensex and Nifty reached new all-time highs on expectations of increased FDI limits in a number of sectors. The bullish sentiment was spread around the range of stocks with the BSE showing an advance- to-decline ratio of 1.31, while the comparable number on the NSE was 1.96.

When expectations are sky-high, a bit of unpleasant news is all it takes to shake the confidence. When the government announced a deferral on any decision regarding increasing FDI investment limits in the telecom sector, markets tanked. The Sensex shed 130 points as telecom stocks were all impacted. Bharti Tele-ventures lost 1.64 per cent, MTNL was down 3.38 per cent, while VSNL fell 2.08 per cent. The losses were spread across the board and the other significant losers were Oriental Bank (-6%), BSES (-5.5%) and BHEL (-5.1%).

The last trading day saw a continuation of the losing streak. Amidst a slowdown in FII inflows, the Sensex closed below the 6000-point mark. SBI (down 3.8 per cent), L&T (down 5.8 per cent) and Ranbaxy (down 3.3 per cent) were among the significant losers among index heavyweights. TV Today got listed in this sea of red. At one point the stock was trading at a premium of 132% to its issue price of Rs 95 (Rs 5 face value) before finally closing at Rs181.35.

The final tally at the end of the week saw all sectoral indices in negative territory. The BSE PSU and BSE IT Index were the worst losers falling by 7.23 per cent and 5.26 per cent respectively. The BSE Healthcare, Banking and FMCG Index did not have a good show either, ending the week lower by 2.39 per cent, 1.86 per cent and 0.83 per cent respectively.

FII numbers will be very closely watched in the coming week to detect any sign of weakness. Quarterly results will also be an important factor in any stock specific action. Further sops by the government along with a decision on the elections will be key drivers for the markets.