Current Economic Statistics and Review For the Week 
Ended February 24, 2007 (8^th Weekly Report of 2007)

Theme of the week:

The Indian Derivatives Segment *

The equity derivatives segment of National Stock Exchange of India Limited (NSE) has been scaling newer heights and setting up new records for past few years, though the derivatives began in the country on the organised exchange just six-years back. It has been a commendable achievement in such a short period wherein it competes with the world’s best exchanges in terms of the structure, systems and regulations. Recently, in November 2006, Asia Risk Magazine has awarded ‘Derivatives Exchange of the Year’ to (NSE). ‘Asia Risk’ is the only publication dedicated solely to the business of financial risk management and the derivatives market in the Asia-Pacific region since 1995. This award recognizes best practice, quality service and innovation in derivatives and risk management in the Asia-Pacific region. The winning institutions are those that, over the past year, have responded best in the needs of their clients, both on the asset and liability side, along with the end-users that have demonstrated outstanding trading and risk management strategies.

While the derivatives trading has been receiving various accolades from the world community at large, there are a number of issues which need to reviewed particularly in terms of its investors base, and about the entire structure of the derivatives segment which has been considered by some of the experts that they have become risk enhancement instruments instead of risk minimisation.

Position of NSE’s F&O segment in International Markets   

As per the data put out by the Futures Industry Association (FIA), NSE’s position in the global futures and options volume has been improving with each passing year as shown in Table 1 from 33rd position in 2002 to 14th position in 2005 which has further improved. The performance has been even better in case of futures wherein NSE stands at 7th position. As per the latest data available for the December 2006, the NSE’s position has been consolidated even further in case of index futures and options while in case of single stock futures NSE’s premier position has been overtaken by JSE exchange (African Stock Exchange). However for the calendar year 2006, NSE retains its pristine position followed by JSE (Tables 2& 3).

Structure of Derivatives Segment in NSE

            Among the four types of instruments traded extensively on NSE, there is an unusual dominance of futures as compared to that of options, which is quiet different from that observed by worldwide derivatives volumes. In India , futures account for more than 85 per cent of the total volume while options account for only 13 to 14 per cent. Of the futures turnover, single stock futures[1] has been the most dominant segment and it alone accounts for more than 55 per cent of the total derivatives turnover (Table 4). Also, its interesting to note that the growth of index futures remained subdued until 2003-04, but following the introduction of derivatives based mutual funds, the growth of index futures has increased phenomenally.    

            Among the world exchanges, only 16 exchanges out of more than 40 exchanges have allowed stock futures trading as per the data put out by World Federation of Exchanges. Of them substantial trading is seen on only a few exchanges with NSE leading the group followed by JSE of Africa and by BME Spanish Exchanges and Borsa Italiana. 

  Unusual dominance of Stock Futures

On the recommendation of L C Gupta committee (1997), index futures were introduced first followed by index options and stock options between June 2000 and July 2001. Though the committee preferred introduction of other three types of derivatives and said that even US did not permit individual stock futures and was not in favour of futures in individual stocks. However, now stock futures constitute more than 55 per cent of total futures trading followed by index futures.

The daily average derivatives segment volume increased from Rs 116 crore between June 2000 and March 2001 and thereafter rose to Rs 2, 640 crore in October 2001 but jumped to Rs 4,380 crore in the next month following the introduction of stock futures. Since the introduction of stock futures, the derivatives segment volumes have been surging and has now catapulted the first position among the global exchanges. Unusual success of stock futures has been to an extent attributed its similarity with earlier badla[2] system and the market participants who earlier participated in badla are now active in stock futures. In single-stock futures trading you do not have to pay for the full value of the shares you buy; you only have to pay a small margin. In contrast, if you buy in the cash market, as most household investors do, you have to make the payment in full. The fact that you can buy shares by investing only a fraction of the price of the share makes it possible for speculators to manipulate stock futures. In futures trading the margins are very low as it allows for large-scale speculation. In fact, prices can also be manipulated if there are cartels in the market. The FIIs can do this very well. L C Gupta opines that FIIs should not be allowed to trade in single-stock futures. The dominance of single-stock futures is the most important architectural weakness. It arises from certain other features of the futures system. When single-stock futures trading was introduced, it was originally envisaged that there would be a physical settlement when the futures contract matures [typically, on the last Thursday of the month with contracts for three months running simultaneously at any given point of time]. This would require actual delivery of the shares by the seller to the buyer. SEBI said that this would happen within six months after the introduction of single-stock futures (L C Gupta, 2006).

Even after six-years of its operations physical settlement is still awaited. Since physical settlement imposes restriction on the market participants, as the number of shares available is always in short supply and thereby induces discipline. But cash settlement does not pose such a restriction as arrangement for cash are easily done. However, it was considered that physical settlements would increase the possibility of a bear squeeze, especially in scrips where the floating stock is low. In a bull market, the floating stock available on a daily basis shrinks rapidly even though trading volumes on the bourses appear high. More importantly, the entire point about introducing derivatives trading was to take the speculative element out of the cash segment and separate cash from speculative trades- the arbitrage between cash and derivatives keeps prices true and correct.

However, it is worth noting that Deena Mehta (2005), former President of BSE, has attributed the sharp surge in stock indices partly to the structure of derivatives market wherein the absence of physical settlement is allowing investors to hold large positions and rollover of the same at the time deliveries. She further says that the country takes great pride in following international best practices but in all developed countries, derivative trades are delivery settled. Emphasizing that equity futures are essentially intended to serve as hedge against unanticipated risks, Dr R H Patil (2006), chairman of the Clearing Corporation of India, argues, “Most of the countries that have introduced equity futures have preferred to introduce index futures, and options in index and individual stocks. Very few countries have taken the risk of introducing individual stock futures. Even in those countries where the individual stock futures have been introduced the relative trading volumes are quite modest. The Italian stock exchange, which ranks next only to NSE in terms of value of traded contracts in individual stock futures, accounts for only 25 per cent of NSE’s volume. But when it comes to the value of contracts in index futures the volume of the Italian exchange is nearly twice that of NSE. This is indicative of the fact that individual stock futures are not considered as safe as index futures even in the countries in which such futures products are traded. All the major futures exchanges of the world in the US or Europe consider that individual stock futures are not only highly unsafe but also that they do not serve any justifiable purpose. Despite the obvious risks that individual stock futures pose to the safety and integrity of the capital market of the country, they have been introduced in a hurry in our country. Though recently, Europe is seen to be moving in the direction of stock futures but it already has a well-developed derivatives market”.

It is interesting to note that despite Euronext.life introduced universal stock futures in 2004, it has preferred to cash settlement for UK and US companies but for continental European countries, they have inspite of the success of cash settlement, they have still preferred both cash as well as physical settlement.

Volatility

Another significant issue has been the continuous volatility in the domestic markets. Historically, the domestic stock markets have been more volatile than other market, which was initially attributed to the presence of the badla system, but even after the introduction of the derivatives and removal of badla system, the volatility remains considerably high (Table 5). As per the study conducted by L C Gupta, comparing the volatility of the BSE sensex with that of Dow Jones Industrial Average (DJIA) between February 1, 2006 and May 19, 2006; in case of the Dow Jones, 61 per cent of the days the volatility was less than 0.5 per cent while sensex exhibited this range on only in 21 per cent of the days. At the higher end of volatility, for Dow Jones none of the days was the intra-day movement more than 2 per cent while that for sensex it was about 17 per cent.

   Even now, the BSE sensex and NSE nifty have remained volatile as shown by the data put out by Sebi itself. Not only has the month wise volatility remained high in the beginning of 1990s but remains so thereafter as displayed in the Table 4. The annualised volatility for April- December 2006 as calculated by Bloomberg shows that the BSE and NSE have been the most volatile followed by Thailand SET index.  

Investor Base

 The third issues concerns itself with the investor base of the derivatives market, which has acquired the nature of a private club. However, for a successful market, the mix of hedging and speculative demand is critical. It has been observed that stimulating speculative demand has been relatively easier than natural hedging demand in developing countries. In some cases, this role has been taken on by foreign investors, but in the experience of many developing markets, foreign investors are short-term, speculative players - with some justification, perhaps, if the market regulation and quality is not such as to encourage long-term investment (WFE). As per the WFE’s report, Equity derivative and cash equity trading (1995-2003) notes that both the Indian and the South Korean markets have resolved the lack of institutional investors question by developing extensive retail demand. In both countries, this has been strongly supported by internet usage to simplify access and reduce costs to retail clients. In them and in the Taiwanese market, retail clients provide the investment or hedging demand for derivatives. In fact, most retail trading is speculative in nature, which may raise long-term risk problems if genuine long-term investment institutions do not emerge to provide hedging demand. But for the present, the retail involvement is strong and has provided the basis on which to build derivative markets (Table 6).

Dr Ajay Shah, professor at IGIDR, has noted in one of his media pages (2001) that the equity derivatives market has shaped up as one more success story where an open market design has harnessed Indian retail order flow from all around the country. It is a reminder of the enormous vitality and innovation that is found with the retail segment of the market, in contrast with the south Bombay institutional community.

Against this, the statement by Ravi Narain (2005), Chief Executive of NSE, spoke at Forum for developing markets held at Beijing in June 2005, about the advantages of setting up a futures market in general, and of the NSE’s specific experience. He said that in India , local banks and insurance companies were not allowed to participate, and mutual funds had restricted participation. The market has grown thanks to retail positions, proprietary positions of brokers and foreign institutions. The development of the underlying equity market has obviously favored the development of a sound derivative market. The contracts’ size, around USD 4 500, has been designed to make it accessible to retail investors. Cash settlement and easy rollovers, especially appreciated by institutional participants have been positive for the market’s development. There are now around 300 000 retail investors active in derivatives in India compared to one million in equities.

This implies that 3 lakh retail investors have been accounting for about 60 per cent of the total turnover displays the extreme concentration of the derivatives trading and also shows the shallowness of the derivatives market.  It is pertinent to note that with the latest revelations of the status of demat accounts following the Sebi deadline for compliance with PAN requirements, its has been found out that the National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL) have frozen about 48 lakh demat accounts because investors failed to submit PAN. Of the 77 lakh demat accounts with NSDL, 42 lakh accounts have been frozen, of these, 16.6 lakh accounts have share holdings while 18.6 lakh accounts have nil positions. Of a total of 22 lakh accounts of CDSL, 5.92 lakh accounts have been frozen effective from January 1, of these, 2.5 lakh accounts have holdings while 3.35 lakh accounts have nil position. Interestingly, as on January 15, 2003, there were 40 lakh demat accounts. Thus, in the words of Prithiv Haldea, managing director- prime Database, the capital markets have become a private club (Haldea 2006).

This is an opportune time for the regulators to undertake measures, which were hitherto not considered but with the NSE’s position having being consolidated at the global level, measures to improve the market infrastructure are necessary from the point of view if its healthy growth.

References

Business line (2001) “Volumes soar as single stock ‘futures’ mimic ‘badla’ November 30

Business line (2005): “Is the derivatives market model a weak link?” August 3

Gupta. L.C (1998): “L C Gupta Committee report on Derivatives” 

                   (2006): “Margin-trading did not cause the crisis” Frontline, June 16

Haldea P (2006): “Capital markets a private club”, Frontline, June 16

NSE: “NSENEWS” Various issues

Patil R H (2006): “ Current State of Indian Capital Market” EPW, March 18

Shah Ajay (2001): http://www.mayin.org/ajayshah/MEDIA/2001/equity-derivatives.html

 World Federation of Exchanges (2005): “2004 IOMA Derivative Market Survey” May

                                                     (2006): “2005 IOMA Derivative Market Survey” March

                                                   (2004):“Equity Derivatives and cash trading”, December.

(* Prepared by Piyusha Hukeri [EPWRF])

Highlights of  Current Economic Scene

AGRICULTURE  

The central government has plans to reverse the deregulation process of the phosphatic fertiliser sector, initiated in 1992. The department of fertilisers (DoF) has proposed, a new scheme, according to which, imports of diammonium phosphate (DAP) and Muriate of potash (MoP) would be canalised through state-run agencies like MMTC, STC and Indian Potash Limited. Moreover, the quality and quantity specifications of imported fertilizers would be laid down and at least one state institutional agency would be nominated by each state government to import the required quantities. These state-run agencies would purchase fertilisers from the world market on behalf of the private companies, on a commission basis and then sell the same to importing companies. The new scheme is drastically different from the current one, wherein fertiliser companies import these fertilisers and claim subsidy for the same.

The government is considering creating buffer stocks of agricultural commodities like sugar, wheat and oil seeds, to contain inflation by improving the supply side constraints of these products. The government procurement agencies would be permitted to build up the stocks of these price sensitive products. The government is evaluating two models for creating the buffer stock. As per the first model, the government would buy surplus of the commodity from the market and the stock would be released in accordance with the requirements in both domestic as well as foreign markets. Under the second model, the government would ban the export of these agriculture products when the prices are high, and revoke it when the domestic demand is low.

Domestic maize-based starch manufacturers, who are the members of the Indian Starch Manufacturers’ Association, have cut production by 20 per cent to ensure better realisation for their products following increasing input (maize) cost. The reduction in production would be in effect since February 15, 2007 and might continue till March 15, 2007. The cut in production is applicable to plain starch and liquid glucose and not to starch of pharma and specified textile grades.

The central government has lifted the ban on export of `dollar gram' or kabuli chana, following reports of a crash in market prices. Exports of dollar gram had been banned since June 27, 2006.  The subsidy offered by central government for replanting rubber is likely to be enhanced to Rs 24,500 per hectare in the XI Plan period against Rs 20,000 in the previous Plan. The subsidy, when enhanced, would work out to 25 per cent of the per hectare development cost. Earlier, the Rubber Board had proposed a rise in the subsidy to Rs 30,000 per hectare, but the government had asked to reduce it to the lowest because of a spurt in prices in the last couple of year. Rubber growers have alleged that the proposed increase in subsidy has been insufficient, as the per-hectare cost of replanting was around Rs  1lakh per hectare. Since the grower would get returns only after next 6-7 years of replanting and also incurred substantial cost of nursing the plants through-out this period, the subsidy need to be raised to Rs 100,000 per hectare.

The total area under castor crop in the country for 2006-07 has decreased by 20 per cent from 8,72,000 hectares to 6,98,000 hectares and estimated total production has also come down by 15 per cent from 9,16,000 tonnes to 7,85,000 tonnes. On the other hand, the average yield has increased by 6 per cent from 1,010 kg to 1,067 kg during the same period under consideration.

Despite the central government hiking minimum export price of onions by US$ 40 per tonne to US$ 305 per tonne, the country is likely to export 2 lakh tonnes more by end of the fiscal year 2006-07 on account of strong demand from Pakistan and Bangladesh. Onion exports during April to January 2006-07 have touched 9.43 lakh tonnes against 7.70 lakh tonnes in fiscal year 2005-06. The total exports for fiscal 2006-07 are expected to exceed 11 lakh tonnes. Meanwhile, onion prices, in the domestic market, are expected to soar to Rs 32-35 per kg by the year-end, to the level reached in 2005, owing to 25 per cent decline in output. The preference given to sugarcane cultivation by farmers during crop year 2005-06 resulted in lower area covered under onion. In late 2005, onion had hit Rs 32-35 per kg owing to an increase in demand for exports at 9.44 lakh tonne. The Centre had to resort to imports in order to soften the prices. 

The union budget 2007-08 is expected to announce a 20 per cent increase in allocation for the agriculture sector. The finance ministry is expected to allocate Rs 5,770 crore in 2007-08, as against Rs 4,800 crore for 2006-07. A new scheme —‘Rainfed Area Development Programme’ is also expected to be announced and would receive a funding worth Rs 350 crore for it.  The National Horticulture Mission might get allocation worth around Rs 150 crore, while the allotment for micro-irrigation is set to increase to Rs 1,100 crore compared with Rs 910 crore in 2006-07. The budget 2007-08 is likely to provide additional support to state extension services in agriculture. The agriculture ministry would also be given Rs 1580 crore for other agriculture schemes. The allocation for the Department of Animal Husbandry, Dairying and Fisheries is also expected to be enhanced to Rs 970 crore for 2007-08 from Rs 777 crore this financial year. The Ministry of Agro and Rural Industries is also expected to be given Rs 1,112 crore for fiscal year 2007-08.

Industry

Overall

According to a survey conducted by FICCI, the manufacturing sector has clocked a growth of 13 per cent in the first nine months of the current fiscal 2006-07, spurred by growth rates of over 20 per cent in 65 segments. Air-conditioners (25 per cent), DVD (50 per cent), microwave ovens (20 per cent), personal computers (30 per cent), electrical equipment and machinery (25 per cent), switchgears (37 per cent), textile machinery (25 per cent) and light commercial vehicles (37 per cent) have been some of the sectors to witness over 20 per cent growth during April-December 2006-07. The sectors that registered 10-20 per cent growth rate have been colour television (10 per cent), motorcycles (19.2 per cent), automotive tyre (13 per cent), washing machine (12 per cent), glass containers (11 per cent), biscuits (10 per cent), and processed food and vegetables (10 per cent) in the period. Those sectors that recorded negative growth are natural gas (-2.4 per cent), B&W TV (-20 per cent), transmission line towers (-3.6 per cent) and soda ash (-6.3 per cent). Higher demand from sectors such as textiles and construction has encouraged growth in the production of intermediate and capital goods. The cement industry has taken steps towards technological upgradation with assimilation of latest technology, according to the survey.

Automobiles

As per a research firm Frost & Sullivan Inc, passenger vehicles sales in the country will reach 2.1 million units by the fiscal year 2010 as economic growth and rising incomes persuade more people to buy cars; sales are likely to grow at 14.9 per cent each year in the five years until then. Global production trends show stagnation of European, Japanese and the US markets, indicating potential for Asia with India expected to add a million passenger vehicle production capacity by 2010. Over capacity in China and near stagnating sales in South Korea confirm that India could see the next round of investment in capacity addition. Interestingly, India has the lowest car penetration rate of 8.5 (per 1,000 population) when compared to select developing countries such as Malaysia, Mexico, Brazil, Thailand, China, Sri Lanka, Indonesia and the Philippines, demonstrating the high potential that the Indian market has to offer. The analysis also indicates that if the pace of economy continues to be as robust as present, the commercial vehicles market is expected to grow at a CAGR of 27 per cent with volumes expected to touch about 9 lakh units by 2010 and the two-wheelers market is expected to record 10.1 million units by 2010 with motorcycles continuing to account for 80-85 per cent of the demand.

Pharmaceuticals

A study conducted by IndusView, a firm which advises multinational companies on business opportunities emanating from country’s fast growing economy, expects the domestic pharmaceutical industry, which has witnessed a growth rate of 9.5 per cent over the last five years, is poised to grow over 13 per cent in 2007 and reach a market size of $6.5 billion. According to the study, low cost and high volume generic drugs, merger and acquisitions and country’s growing significance in terms of contract research and clinical trials would help the sector reach critical mass this year. The size of contract research, valued at $100-$120 million in 2005, is growing at a rate of 25 per cent each year and could touch $380 million by 2010 while the current size of generic drugs is estimated at $60 billion.

Infrastructure

Petroleum, Petroleum Products and Natural Gas

The country's crude oil output has increased by 4.7 per cent to 2.9 million tonnes (mt) in January 2007 as compared with the corresponding period last year. However, the natural gas output has fallen by 1.2 per cent to 2.749 billion cubic metres during the month under review. On the refinery front, the domestic refineries have processed 9 per cent more crude oil in January on the back of rising demand.

Power

Nepal has an estimated hydropower potential of 100,000 MW but practically no electricity is being harnessed due to limited resources available to the Nepalese government. Recently, the sector has been opened to private participation and a number of Indian companies like Reliance, GMR Group, Tata, L&T and the J P Group have shown keen interest in developing the hydropower sector with the current projects on bid estimated to have a capacity to generate 300-600 MW of power.

Power in Maharashtra

Over 2.5 lakh industrial units in Maharashtra , which had only recently gotten a reprieve from power cuts, may yet again face the same crisis of shutting down twice a week with the demand for power in the state steadily rising. These units, including continuous and non-continuous units, have also drawn criticism for failing to take cognizance of an order issued by the Maharashtra Electricity Regulatory Commission (MERC) in January 2006 as per which the units were to restrict their monthly power consumption to less than or equal to 80-90 per cent of their average monthly consumption over the previous 12 months in light of the mismatch between demand and supply that has been increasing rapidly.

Power trading companies is Maharashtra have approached co-operative sugar factories to trade power produced by them through co-generation at a tariff of Rs 4 to Rs 4.20 per unit. Currently, only 9 co-operatives have an exportable surplus of 68 MW, while an additional 11 units are setting up co-generation plants with the total capacity of 120 MW. The federation of cooperative sugar factories in Maharashtra, a representative body of over 150 units, reports that against the potential of 1,100 MW, to be generated through co-generation projects, Maharashtra could tap only 68 MW by 9 mills. Further, mills can sell power at Rs 3.05 per unit as approved by the MERC while the power generated through back pressure or steam can be sold at Rs 1.95 per unit to the state distribution company. The trading companies have offered to pay Rs 4-4.20 per unit as they have given the same rate to private sugar mills situated in Karnataka.

Minerals

In a communication to the ministry of commerce and industry, finance and planning commission, the Assocham has asked for an immediate ban on mineral and raw material exports to help domestic industry make finished products at competitive rates and for saving mineral wealth of the country. The Hoda Committee had set a target of 100 million tonnes of iron ore export by the year 2020 which had been achieved in the current financial year itself and the iron ore export is growing at an average of over 15-20 per cent for the last two to three years. On the other hand, the steel imports have grown over 70 per cent in 2005-06 from 42 per cent in 2004-05. Therefore, the Chamber warns that India will become a dumping ground for China and its dependence on countries such as China , Brazil and Australia will increase enormously if immediate steps are not undertaken.

Copper Mining

India has the capacity to smelt 900,000 tonnes of copper; it produces about 500,000 tonnes but mines within the country supply only enough ore concentrate to produce about 33,000 tonnes of the metal while the rest of the ore is imported by the major producers, Sterlite and Hindalco. Hindustan Copper, the public sector company that has the only functional copper mines in the country and yet brings up less than a tenth of the ore concentrate needed, says that the country has sufficient ore but the deposits are just lying there and if investments come in then production can be increased. Total deposits identified are enough to produce 11 million tonnes of metal and another 14 million tonnes are likely to be available provided detailed exploration is carried out.

Ports

The minister of shipping, road transport and highways has asked heads of port trusts to prepare a plan and undertake weekly reviews of the national maritime development programme (NMDP) projects to ensure timely completion of projects under NMDP by 2011-12. At Mumbai Port Trust the process for appointment of consultant for establishing a new cruise shipping facility near Gateway of India under NMDP has been initiated. At JNPT the ongoing project of improvement of road connectivity is expected to be completed by December 2007. At the New Mangalore Port Trust the NMDP project is being undertaken, geophysical studies have been completed and the techno-feasible studies are underway. He has also asked officials to prepare a compilation of projects pending with the Planning Commission, ministry of law or ministry of finance and said that efforts would be made to get clearance for such projects expeditiously.

Railways

The coal ministry wants the Railways to bear losses in transit of coal to power stations in excess of a specified percentage; the ministry is proposing the insertion of such a clause in the tripartite agreement that is being hammered out among the three public sector units involved in coal-based power generation in the country i.e. between the purchaser, NTPC, the supplier, Coal India Ltd, and the transporting agency, the Railways. According to a draft circulated by the ministry of coal, it has been proposed that if transit loss exceeds 0.5 per cent then it has to be borne by the Railways and it is to be worked out rake-wise and would require the Railways to allow weighing of rakes at both the loading and unloading ends. The draft tripartite agreement is aimed at ensuring regularity and committed quantities of coal supplies to the power plants run by NTPC. As per current practice, the Railways is completely absolved of any responsibility of ensuring 100 per cent delivery of the booked amount and as per the coal ministry the power plants have complained on various occasions that the coal they have received is often 3-5 per cent less than the amount loaded by the coal companies.

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) rose by 6.63 percent for the week ended February 10,2007 as compared to 6.73 per cent in the last week or at a lower rate of 3.81 per cent during the corresponding week last year.

During the week under review, the WPI remained unchanged at its previous level of 209.2 (Base: 1993-94=100). The index of ‘primary articles’ group, (weight 22.02 per cent), dipped by 0.1 percent to 215.8 from its previous week’s level of 216.1 mainly due to lower prices of ‘food article like chicken, condiments, spices, fish. However, prices of rage,gram,jowar,barley and milk moved up. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) remained stable at 320.8. The rise of 0.1 per cent in the index of ‘manufactured products’ group can be attributed to the spurt in prices of cement,cables etc. However the fall in the prices of  gur, rawa, bran and atta had a sobering effect in the rise in the index of manufactured products.

 The latest final index of WPI for the week ended December 16.12.2006 has been revised upwards; as a result both, the absolute index and the implied inflation rate stood at 208.4 and 5.73 per cent as against their provisional levels of 207.8 and 5.43 per cent, respectively.

Banking

State Bank of India , the country’s largest bank, has raised its prime lending rate (PLR) for the second time in less than three months, but at the same time has decided to spare existing home and educational loan borrowers from the hike. SBI has raised its PLR by 75 basis points to 12.25 per cent with effect from February 20 and also announced that it will be offering the highest interest rate of 9.5 per cent among commercial banks for deposits with maturity of 4 years to less than 5 years.

ICICI Bank is likely to increase the share of its international business from the current 17 per cent to 25 per cent by 2009. The bank plans to achieve this through export financing, funding and syndication facility for corporate investments and overseas mergers and acquisitions.

Centurion Bank of Punjab has increased its prime lending rate (PLR) by 100 basis points to 14.50 per cent per annum from March 1, 2007.

J M Financial has announced its decision to part ways with Morgan Stanley’s the world’s second-largest securities firm and its partner of 7 years. Morgan Stanley will pay $445 million for J M Financials 49 per cent stake in J M Morgan Stanleys Securities, the institutional broking company. At the same time, the US firm will sell its equity in investment banking joint venture JM Morgan Stanley Pvt Ltd to J M Financial for $20 million. Morgan Stanley will be building its own investment banking business in India .

ICICI Bank, the country’s second largest bank, has hiked its lending rates for fresh loans to individuals by 50 basis points, following a 50 basis point increase in CRR by the RBI. However, the bank has not announced any increase in interest rates on loans to corporates.

Public Finance

Direct tax collection for the current fiscal year, a week before the budget for 2007-08 have continued to be buoyant at Rs 1,63,423 crore, a 39.5 per cent rise, against Rs 1,17,148 crore collected till the same period of the previous fiscal year. It has been almost equivalent to the direct tax collection of the central government for 2005-06 at Rs 1,65,208 crore. Due this buoyancy in the overall direct tax collections the tax department has planned to increase its budget estimate of Rs 2,10,684 crore for direct taxes for the fiscal year by at least Rs 30,000 crore.

As of February 19, 2007 the corporate tax collections, have witnessed a rise of 44.7 per cent on year-on-year basis totalling to Rs 1,00,655 crore. This massive increase in the collection of corporate tax has been mainly due to strong corporate earnings, so far in the current fiscal year and because of large amount of advanced tax had been paid by the companies during the fiscal year 2006-07. Companies had paid a record Rs 69,65 crore as advanced tax this fiscal.

Personal income tax collections, including fringe benefit tax, has also continued its record growth to register a 29.2 per cent growth at Rs 57,844 crore, compared with Rs 44,776 crore collected during the corresponding period lof the previous fiscal year. Securities transaction tax collections have stood at Rs 4,266 crore, a substantial increase of 85.9 per cent over a year ago. Similarly, banking cash transaction tax (BCTT) has also witnessed a growth of 72.9 per cent at Rs 409 crore.

Financial Markets 

Capital Markets

Primary Market

Page Industries Ltd. is to tap the market between February 23 and 27 by offering shares of Rs 10 each in a price band of Rs 360-395 per share.

The terms of the issue of Tubeknit Fashions Ltd. has been changed; issue will close on March 02, 2007 instead of the earlier closing day of February 27, 2007. Further price band has been revised from Rs.100/- to Rs.120/- per share to Rs.90/- to Rs.108/- per share.

Secondary Market

The market declined through the week amidst high volatility. Factors like the CRR-hike, rising inflation, concern over rising domestic interest rates, unwinding in derivatives ahead of the expiry of February 2007 contracts on 22 February 2007, and fear that short-term capital gains tax may be hiked in the Union Budget 2007-08 to be presented in Parliament on 28 February 2007 were the major triggers for the fall.

Caution was also partly due to worries of a possible interest rate hike by the Bank of Japan (BoJ), which raised benchmark lending rates in the country to 0.50 per cent on 22 February 2007.

The BSE Sensex shed 723.02 points for the week ended 23 February 2007, to settle at 13,632.53 compared with the previous week’s closing of 14,355.55 on 15 February 2007. The S&P CNX Nifty lost 207.30 points, to settle at 3,938.90 compared with the previous week’s closing at 4,146.20.

The BSE Mid-Cap Index shed 288.12 points for the week ended 23 February 2007, to settle at 5,664.89 compared with the previous week’s closing of 5,953.01. The BSE Small-Cap Index shed 385.83 points, to 6,904.43 compared with previous week’s closing at 7,290.26.

Derivatives

With a slew of negative news such as price rigging in case of Atlanta , expectations from budget, there was a heavy selling in derivatives contract ahead of the expiry of February contracts. FIIs turned net sellers of all the derivative instruments on February 21 and 22, which affected the market sentiments.     

Government Securities Market

Primary Market

RBI conducted auction for the buy-back of certain specified SDLs by two state governments i.e. Orissa and Rajasthan. The total amount of securities bought back from Orissa and Rajasthan was Rs.310.90 crore and Rs.84.46 crore respectively.

RBI conducted the auction of State Development Loans (SDLs), 2017 for seven states for an aggregate amount of Rs.3,399.57 crore through a yield based auction using multiple price auction method. The cutoff yield of security was 8.17 per cent for Andhra Pradesh, 8.1 per cent for Arunachal Pradesh, 8.45 per cent for Uttar Pradesh, 8.2 per cent for Assam and Madhya Pradesh and 8.19 per cent for Kerala and Tamil Nadu.

Secondary Market

During the week, the weighted average call rates during the period ranged between 8.08 per cent and 6.33 per cent, while weighted average repo rates ranged between 7.60 per cent and 6.09 per cent and the weighted average CBLO rates ranged between 7.50 per cent and 6.04 per cent. The average volumes of Call, Repo and CBLO segments were Rs.13424.24 crore, Rs.7884.64 crore and Rs.20043.97 crore respectively. The daily average outstanding amounts in the LAF (reverse repo) and LAF (repo) operations conducted during the period were Rs.4007.00 crore and Rs.3699.00 crore respectively. CBLO Segment clocked the record number of 541 trades and highest volume of Rs.27,213.25 Crores onFebruary 21, 2007.

The weighted average YTM of G.S 2017 8.07 per cent bond was 7.9407 per cent on February 23, 2007 as compared to 8.0821 per cent on February 15, 2007. The 1-10 year YTM spreads decreased by 15 bps to 11bps.

The first phase of CRR hike failed to affect the market sentiments due to improved liquidity situation due to RBI’s intervention in forex market. Also expectations of a bond market friendly budget and slowing inflation supported these sentiments. Further, the market expected lower market borrowings given the buoyancy in the tax collections.

RBI issued the modified provisions regarding the Cash Reserve Ratio (CRR.). The modified provisions are as follows: (1) The minimum CRR level of 3 per cent and the maximum CRR level of 20 per cent of total bank demand and time liabilities would be maintained as per the RBI Act; (2) RBI has decided to exempt those banks from payment of penal interest which have breached the statutory minimum CRR level of 3 per cent during June 22, 2006 to March 2, 2007 on account of CRR exemptions reckoned for computation of demand and time liabilities for CRR; and • RBI would pay interest on eligible CRR balance in the following manner:

(a) Interest @ 3.5 per cent for the period June 24, 2006 to December 8, 2006;

(b) Interest @ 2.0 per cent for the period December 9, 2006 to February 16, 2007;

(c) Interest @ 1.0 per cent from February 17, 2007 until further notice.

Foreign Exchange Market

The rupee depreciated by 9 paise as the state run banks continued to purchase dollars and importers month-end demand and also dollar’s rally against other major currencies such as yen and euro and weakness in domestic stock markets.

The six-month forward premia closed at 3.22 per cent (annualized) on February 23, 2007 vis-à-vis 3.71 per cent on February 15, 2007.

Commodities Futures derivatives

Faced with falling prices and a production glut, sugar mills have begun to hedge their risks in the futures market. "Sugar companies are making forward sales in the futures market. At least 30-40 mills are actively trading in the commodity," said an official of NCDEX.

The NCDEX Managing Director, Mr P.H. Ravikumar, told Business Line that corporates were actively taking part in futures trade and sugar contracts was one of them. He, however, declined to reveal the name of the companies taking part in forward sales. "Not just sugar, companies are also participating in forward contracts of wheat and other commodities," he said.

During December-January, the daily volume (one-way) in sugar contracts was about 35,000-40,000 tonnes. "This is a 15-20 per cent lower than the volume witnessed during the same period a year ago," said Ms Sanvali Kaushik, Vice-President (Products) of NCDEX. Asked if taking part in futures would have an effect on the monthly quota of sugar fixed by the Centre for mills to sell in the open market, she said it would come into play when physical delivery was made. However, deliveries were restricted to 2,500 tonnes a party or person and, therefore, it would not count much.

In view of the increasing interest in sugar futures, NCDEX recently simplified the contracts and introduced more points of delivery to ensure level-playing field for all the participants.

According to Mr Prakash Naiknavare, Managing Director of the Maharashtra State Co-operative Sugar Factories Federation, three mills of their association were taking part in the futures. "We are in favour of mills participating in the forward market. Since we are facing crisis, it is important for the mills to look for every opportunity to make profit. In fact, we would like many more mills from our federation to take part in forward trading," he said.

However, a problem with regard to sugar futures is that the counter for medium sugar is more active than small sugar. "This puts at disadvantage mills mainly in Maharashtra co-operative sector," trade sources said. During the weekend, medium sugar was quoted at Rs 1,424-1,534 a quintal in Mumbai. On NCDEX, the grade was quoted at Rs 1,493 for March contract and Rs 1,443 for April contract.

Corporate Sector

With the 51:49 joint venture Michelin Apollo Tyres failing to take off, the France-based Michelin, the world’s second largest tyre-maker is planning to set up its own truck and bus radial manufacturing facility at Ranjangaon. In 2004, Apollo and Michelin had announced a tie-up for setting up a production unit in Ranjangaon, to produce truck and bus radials, primarily to cater to the domestic market. Later in 2005, Apollo Tyres and the Michelin group agreed to “realign their business plans” and had announced Apollo’s exit.

 Lakshmi Mittal, the world’s largest steel producer, has made a entry into oil refining and production in partnership with state-owned HPCL. Mittal Investments has bought 49 per cent in HPCL’s new refinery at Bathinda, Punjab for Rs 3,200 crore.

The joint venture involving Mahindra & Mahindra (M&M), Renault of France and Japanese major Nissan for production of passenger cars has decided to set up its plant at Oragadam, 60 km from Chennai. 

Civil Aviation Minister Praful Patel informed that the empowered Group of Ministers has approved the merger of Air-India (AI) and Indian Airlines (IA). The proposal would be placed before the Cabinet soon and merger would be completed by 31^st March 2007. In addition, the merger gets tax benefits under Section 72A and have to set off for loses of Rs 1150 crore. The merged entity would have 33,000 employees, and 200 per aircraft by 2009. Though integration of human resources is a major obstacle in merger, minister assured that it would be a ‘painless affair’ for employees.

US oil major Chevron and domestic oil and gas company Reliance Industries Ltd, may jointly bid for the upcoming auction of Russia ’s bankrupt oil company, Yukos. RIL has for long been strategising an entry into oil- and gas-rich Russia .

India ’s largest FMCG company, Hindustan Lever Ltd (HLL), has reported a 31.8 per cent rise in its net profit to Rs 1,855 crore in calendar year 2006, up from Rs 1,408 crore in 2005. The company’s board has proposed a final dividend of Rs 3 per share of Re 1 each, subject to shareholder approval. This, along with an interim dividend of Rs 3 per share, amounts to a total dividend of Rs 6 per share for 2006.

Telecom

The number of domestic long distance telephony operators will have increased from 4 to 31 in a year. Even though, the business generated by this sector has shrunk from Rs 8,000 crore to Rs 5,000 crore in three years due to an 80 per cent drop in tariffs from Rs 6-8 a minute to Re 1. Five new licences have been issued in recent weeks to Idea, Hutch, Sify, British Telecom and AT&T and 22 other applications are being processed. Although, forecast are not available, the prospect of rapid growth, a sharp increase in average talk-time to 380 minutes from 220, the advent of gaming advanced web applications and growing IT-enabled services revenues are expected to drive growth. Some major applicants: Cable & Wireless, Verizon, MTNL, Railtel, HCL, Tulip IT Services, Powergrid Corporation, Tata Teleservices, Idea Cellular, Spice Communication, Dishnet Wireless, Sify.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

LIST OF WEEKLY THEMES

We will be grateful if you could kindly send us your feed back at epwrf@vsnl.com