Current Economic Statistics and Review For the Week 
Ended June 9, 2007 (23^rd Weekly Report of 2007)

Theme of the week:

Working of Commodities Futures Markets

There had been an interesting debate on the merits and demerits of the working of the commodity futures market in India in the recent period. The arguments put forward by Kamal Nayan Kabra (KNK) in his article ‘Commodity Futures in India’ (EPW, March 31, 2007) were questioned in a subsequent article titled ‘Working of Commodity Futures Market’ (May 5, 2007) by Madan Sabnavis and Shilpa Jain (henceforth in this note, MS and SJ). They have delineated 10 issues from KNK’s articles and sought to comment on them with data and perceived global parallels. However, their comments against the KNK article have raised a few questions which we have tried putting  across in this note.

Its interesting to observe that the MS and SJ have chosen to say that ‘the commodity futures market has been viewed quiet unfavourable’ in the KNK articles though its author is the very person who recommended introduction of futures market in the country in his landmark report on commodity futures market in India . KNK has viewed the current opertions of futures market as unfavourable and the commodity futures market per se.

 It is a widely held view that commodity futures market benefit the farmers through the price discovery process. But, its growth trajectory in the past few years has given rise to a number of issues, which have remained unresolved; these are the issues that we are endeavouring to put forward in this note. Doubts have arisen  in terms of commodity coverage, presentation of statistical results without presenting basic  data, usage of truncated data which camouflage the distinct shallowness of the market. In addition, there has been no reference being made to the various commodity bodies that have put-forward their concerns and continuous issues during the settlement. Usually, in the initial stages of a market’s development, it is  liable to drift; and it is in the interest of the market and the community at large that these issues are sorted out and a more refined development path chartered. Instead, there is a plea for allowing the exchanges to operate as they have been doing rather than making an attempt to reforming or changing the current operational style, so that the health of the market improves.     

Speculation and Participation

The view of KNK that futures markets as they operate now are purely speculative because there are very few end-users of commodities; this has been refuted by the authors by presenting the ratios of utilized hedge limits to open interest in case of six commodities for a particular date. According to the authors, the hedge limits

have been utilised by the market participants and they are being given these limits who are able to prove to the exchange that they are users of the commodity. The tabular data given by the authors show ratios of utilised hedge limit to open interest, in respect of six commodities for particular date are reproduced here in Table 1.

There are two issues which are required to be raised here. First, to measure the relative size of utilized hedge limit, the ratio should have to be in relation to the traded amount and not to the size of open interest which will always be puny and which will hence give a high ratio purporting to prove that the hedgers have a large role. On the other hand, this ratio may not be high if it is in relation to the traded amount.

   Secondly, it is unclear as to why the authors have not included the top traded commodities namely Chana, Guarseed and Jeera. As is  evident from Table 1.A which we have culled out from the members’ newsletter of NCDEX, high trading interest is in above commodities, where as the authors have, interestingly included commodities, which have relatively lower trading volumes and in which there are some obvious hedging interests. Moreover, statistically ratios can be a very deceiving tool as it camouflages a lot of data diversity. It would be of great benefit if actual figures are made public and then it should be left to the readers to apply statistical tools to arrive at studied conclusions. 

Further, the claim that there is a huge hedging interest in the futures market would be better appreciated if the exchanges provide this information as a matter of routine reporting along with the definitions and criteria set for defining hedging interest as against speculative interest.

The second issue pertains to the significance of speculators. MS and SJ have endeavoured to explain  in detail the role played by speculators and their significance. But, it appears that they have missed the point made by KNK as he had said that ‘the basic point is: the dominance of the speculator-financial interests in futures gets accentuated by structural and institutional weaknesses and barriers preventing participation of cultivators’ and further he quotes Pilbeam (2005) that it is inherent in the character of the futures markets that “like other financial instruments, futures and forward markets can be used for both managing risks and assuming speculative position,s. In addition, he  says that ‘it would be facile to suppose that even without their participation, the outcomes of the futures market can be beneficial for the farmers or small traders who stock and supply the cereals to the consumers all round the year’(pp 1167).

Next, the authors have accepted that small farmers are not directly participating on the exchanges because of the contract size and lack of understanding of intricate details of trading on exchanges. Yet, they are emphasising the indirect role played by their price dissemination efforts which no doubt will be beneficial for those with greater holding powers while its success will be unusually slow for these small farmers unless they are made direct beneficiaries of the system. Further, MS and SJ have in their article highlighted the findings of A C Nielsen’s study (2007), titled ‘Executive Report on Brand Awareness’ for the NCDEX shows that farmers in vicinity of commodity-centric towns are aware of the NCDEX and futures trading. This implies that the concerns of KNK have been valid as the awareness of futures trading in commodity-centric towns has been high even in the absence of the futures trading.   

Price, Volume and Delivery

The third issue pertains to price volatility as KNK had concurred with the widely held belief that prices have become more volatile with the advent of futures trading in the country. The authors have sought to refute this belief by presenting information on annual average price volatility for wheat, sugar, chana and maize for the two periods of 2001-04 (pre-futures) and 2004-06 (post-futures). Their results are reproduced here in Table 2. It is not clear as to what is the nature of prices used by the authors. If it is the spot price of the concerned exchange, it becomes worth mentioning first that NCDEX , as per their website, was incorporated on April 2003 and began operations on December 15, 2003. That being so, what are the pre-futures prices being compared in the table ? 

Secondly, it is unclear as to why urad and guar seed has been excluded from this list; these experience the largest volumes on the exchange most of the times. Finally, if  their claim were valid then it would be in the interest of the commodity futures market to publish these details on a regular basis and with detail price information rather than estimational  methods  that are widely known.

The fourth area of confusion is with respect to the volumes traded on exchanges. The association of high volumes to supplies the authors argue, is being considered erroneously as though that there is something amiss in the market. MS and SJ further say that a high multiple trading is not alarming. They explain the concept of open interest and link it with total availability of the commodity in the country and suggest that it has been very low. They conclude that ‘it is not possible for these high volumes to have an impact on price movements as it is the open interest position that ultimately drives the prices’. While the relevant  data are published by the exchanges in the bhav copy and commodity-wise query, but analysing that information on a daily basis is a very cumbersome process. It would be a great help if the exchanges provide daily a table of traded value along with hedging interest as well as open interest to gauge the speculative element in it.

The fifth issue  highlighted relates to low deliveries. The authors argue that world over deliveries are low and that it is so because of the high costs involved in using exchange mechanism for delivery; moreover, the genuine users of commodities use exchanges for hedging and not delivery. This point is well taken. But it is unclear whether the deliveries witnessed on NCDEX are above the norm. The facts disseminated without juxtaposing trading with deliveries.This is precisely so because FMC publishes data for trading and NCDEX independently puts out data for deliveries. If we put them together for the month of February, then the total traded volume stands at 20569205 MT and deliveries as given by the exchange stand at 16651 MT excluding gold, silver and mentha oil which are given as 160875 KG. In the Indian case, deliveries are not even one per cent.          The sixth issue concerns the propagation of trading in commodities based its strong economic rationale. The economic rationale is not doubted provided the trading ensures a realistic balance between speculation and genuine hedging, between trading and deliveries, and between trading and open interest. The trading ceases to have any sound economic rationale if the balance is overwhelmingly tilting towards speculation. The decision making processes in India have not inspired confidence in the minds of well-meaning professionals like KNK that economic rationale has been the driving force in permitting trading in as many as 95 agricultural commodities and what is more in not insisting on healthy distinction between speculation and hedging. Moreover, internationally most of the exchanges offer very few commodities unlike in the Indian exchanges. For instance, in the Tokyo commodities exchange, only 8 commodities are allowed to trade.   

Spot Prices and Futures Trading

   The seventh area of concern relates to the absence of link between spot prices and futures prices as argued by KNK. In this connection, MS and SJ have attributed the price rise to supply factors, which is undoubtedly accepted by all and the sharp spurt witnessed in prices in some of the commodities has been due to shortfall in production. With the help of data presented in Table 3, they have sought to infer that the inflation spurt has been due to some shortfall in production of many food items and not because of futures trading.

  Though the fall in production of food grains has been an area of grave concern and has been one of main reasons for pushing up prices, the rough analysis of the past trend of production and price behaviour shows that the fall in production has not necessarily resulted in price rise and also not of the magnitude witnessed in the recent past as shown in the Table 4. 

Price increase in individual commodities are a complex phenomenon. Juxtaposing production trends and price variations are not enough to disprove that futures trading may not have complicated the inflationary situation. It is necessary to be sure, above all, of the quality of trading, the size of deliveries, the extent to which farmer have genuinely benefited from price discovery and income realisation; if an overwhelming benefit goes to unearned and speculative incomes of traders, the so called economic rationale is a myth.

For instance, the authors have argued that the wheat prices have shot up due to sub-optimal production and falling stocks for two successive years. But, as we have put the data for production and inflation across a number of commodities for past 7 years we find that fall in production has not necessarily resulted in pushing prices and at times high production has been associated with elevated price levels.

Eight, MS and SJ consider that the argument put forward by Kabra that futures cannot provide an answer to post-harvest problems of storage, financing etc. are incorrect as commodity exchanges make provisions for multiple delivery centres and warehouses are accredited and reputed assayers are sought to maintain the quality. Further, warehouse receipts would enable loans for farmers. This present a double issue as on one hand the small farmers by design and structure are left outside the purview of the exchange and on the other, they have said that exchanges are not preferred for delivery but for price discovery implies that the so called infrastructure of exchanges would not be used exhaustively. Further, if the data on usage of these facilities is provided on regular basis it would help strengthen the information system

Market Reach

According to MS and SJ, the ninth misconception held by KNK is that futures trading does not have widespread participation. The authors, however, contend, that there are nearly 20,000 trading terminals in over 550 locations indicates the reach of the exchanges and data pointing to number of members holding long and short positions and similar client positions are enumerated along with number of locations. But, as per their statement ‘ There are over two lakh users on the NCDEX’ implies that the reach is very narrow and further numbers presented are not impressive where there is huge farming community of about 894 lakh as per the 59^th Round of NSSO  survey year 2003 (SAS) in the country. Further, the analysis of the location of member of NCDEX as per the member’s list provided on their website, we find that they are overwhelmingly located in a few areas where the trading activity dominates such as Mumbai, Delhi , Kolkatta and Indore .

Finally, options on commodities are by their very nature more complex and include payoffs which are much more complex. Hence by their very nature, they will be attractive to those better equipped to understand the intricacies involved in trading in them and also those who have large holding capacities. Given the present day skills and holding day capacity of the farmers, the suitability of introduction of options is questionable, which would be beneficial at a later stage as the skills are upgraded. As the authors have said that if a farmer sells at a price of Rs 100 and realise at the time of harvest the actual price would be higher, then he need not sell on the exchange and could instead only forego the premium which he has paid upfront.  Now here the loss for the farmer is the premium he has been paying just for holding the privilege for several months as the gap between sowing and harvesting is indeed a number of months and at times that could add up to be more than the benefit so stated. Options will be beneficial as the market and market participants grow to that stature of using them effectively and not favour or address the needs of just one class of participants. Next, the minimum support price being highlighted as a veiled option, but the most significant aspect of this is that the farmers are not paying any premium for it and so there is no escalation of cost affecting their risk – reward patterns which a exchange offered option would entail.

To conclude, it appears that the authors have tried to justify the current functioning of the commodity futures market and have pleaded for continuation of the same, as it is just three years old. However, given the various issues that have emerged it would be better if these commodity exchanges endeavour to work towards the goal set ahead for these markets and ensure that the markets grow not just in terms of liquidity but in terms of depth and width of the market.

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* This note has been prepared by Piyusha Hukeri

Highlights of  Current Economic Scene

AGRICULTURE  

India ’s wheat procurement has picked up after a government strategy to import the grain forced farmers to offload their stockpiles, lowering the need for big imports this year. The government has extended the procurement operations to end-June 2007 from the usual close of May on account of increase in the inflows to state inventories to 106.67 lakh tonnes by the end of first week of June. The ministry of agriculture has decided not to float wheat import tenders immediate short run before examining procurement trends over the next 15 days. Notwithstanding this, the MMTC Ltd. has floated a wheat import tender for 50 thousand tonnes. MMTC's tender is a commercial transaction for supply of wheat to domestic roller flourmills. It would open on June 19, 2007 with bids valid till June 29, 2007. The wheat, meant for private millers, is said to have been contracted for a price of $236 per tonne cost, insurance freight (CIF).

As per the Solvent Extractors’ Association of India (SEA), exports of oilmeals from the country have declined by 10 per cent to 2.30 lakh tonnes for the month of May 2007 from 2.56 lakh tonnes in the same month last year mainly due to decrease in exports of soya meals. Soya meal exports have fallen to 1.40 lakh tonnes to 1.10 lakh tonnes in May 2007. However, there was no export of groundnut meals (as against 18,525 tonne in May 2006) due to failure of groundnut crop. During the seven months of current oilseed crop season (November-October) 2006-07, the exports of oilmeals have increased by 8.1 per cent to 38.7 lakh tonnes over same period of the previous season 2005-06 with export of rapeseed meal, rice bran extraction and castor meal, also, showing an improvement in their respective exports.

In order to ensure adequate availability of fertilisers at local level during the current kharif season 2007, the department of fertilisers (DoF) has plan to pre-position stocks at the state-level at 75 per cent of the monthly requirement by the start of the month. The department has added that the total stock must be positioned by the 15^th of the month. Requirement of fertilisers during the current kharif season is estimated at 131.65 lakh tonnes of urea, an increase of 7.5 per cent over last season, 40.08 lakh tonnes of di-ammonium phosphate (DAP), a 21 per cent increase and 16.52 lakh tonnes of muriate of potash (MOP), a 13 per cent increase over corresponding previous year.

The central government is expected to increase the outlay for the farm sector by 142 per cent, to Rs 1,43,000 crore, during the XI five-year Plan. The central government’s share, in the total outlay of Rs 1,43,000 crore, would be Rs 93,000 crore, 341 per cent higher from the X Plan amount of Rs 21,068 crore. The share of states would be Rs 50,000 crore, 32 per cent higher over the X plan’s outlay of Rs 37,865 crore. According to the estimates of the Planning Commission, the share of agriculture in the annual plan outlays of states had declined from 5.2 per cent in 2002-03 to 4.7 per cent in 2006-07. It is expected to drop further to about 3.5 per cent in the current (XI) plan. On the other hand, the central government’s allocation for the sector has increased from 2.5 per cent in 2002-03 to 3.8 per cent in 2006-07 and is projected to increase to over 6 per cent in the XI plan.

With an aim to compete in the world silk market with hi-quality products, weavers’ associations in Karnataka are promoting two silk parks around Bangalore, which would bring the entire processing of silk related items under a single roof by accommodating units for reeling, twisting, dyeing, weaving and garmenting by adopting new technologies; for the first time in India. One park has been promoted by Doddaballapur Weaver Association in Karnataka is promoting one park under the banner of Doddaballapur Integrated Textile Park (DITP) in Doddaballapur area, requiring an investment of about Rs 40 crore, which would accommodate 150-200 silk processing units. Another park would be set up by Karnataka Silk Weavers Federation under the banner of Bangalore Hi-Tech Weaving Park (BHWP, which would get 40 per cent subsidy from the central government.

The Spices Board has set out various plans to promote the export of high-end, value-added spices from India . The board has embarked on Flavourit Spice Trading Ltd, a wholly owned subsidiary of the board, to launch branded spices from India across the world under the brand name of Flavourit and has invested Rs 10 crore in this venture so far. Besides, the board would set up four spice parks in the country. Out of these 4 parks, 2 would be set up in Kerala, one each for pepper and cardamom, one in Andhra Pradesh for chillies and the remaining one in Uttar Pradesh for mint.

The agriculture ministry is targetting to produce 150 lakh tonnes pulses for the current fiscal year 2007-08, while resolving to achieve production level of 170 lakh tonnes for the next fiscal through a host of measures The ministry is planning to increase the area under cultivation for pulses through inter-cropping and production through the Food Security Mission. It has asked the rice growing states to sow short-duration pulses on the fallow land in the Kharif season after rice production. The ministry has decided to increase the minimum support price for pulses to boost production.

The sugar industry is examining a range of options as a mounting glut in sugar production and dropping prices threatens its viability and sugarcane payment to farmers. Among the options being examined are a market intervention mechanism and raw sugar exports, apart from increasing the buffer stock. The central government has agreed to create a buffer stock of 50 lakh tonnes of sugar special purpose vehicle. According to the Indian Sugar Mills Association an independent company specially promoted for market intervention to regulate sugar prices, can be another way out to curb the further fall in sugar prices.

The agriculture ministry is planning to promote land share companies. According to this new concept, farmers from any specified village or a cluster of villages can become shareholders in proportion to their size of holdings. The land would be leased out to the company and the farmer would receive a share in the profit of the company. At the same time, he can lease in land including his own land from the company for cultivation for a fixed rent. According to a proposal access to shares in the land share company should be largely restricted to farmers and up to 25 per cent of the paid up capital of the company can be subscribed to in cash by others, including an agro-processing unit or a trading company. A farmer can sell his share to other farmers, but the shares should not be traded through public issue, as there may be risk of takeover by corporate houses or other entities.

The Finance Ministry has removed the port restrictions on imports of quota tea from Sri Lanka at a concessional rate under the Indo-Sri Lanka free trade agreement (FTA), as Sri Lanka was not able to use the annual tariff rate quota of 15 million kg due to these restrictions. Under the FTA, up to 15 million kg of tea from Sri Lanka can be imported annually into India at a concessional import duty of 7.5 per cent. During January-November 2006, import of tea from Sri Lanka under the FTA amounted to only 0.060 million kg against 0.094 million kg during the corresponding period of 2005. Prior to the removal of the port restrictions, imports of quota tea and instant tea from Sri Lanka were permitted only through the Calcutta and Cochin ports.

INFLATION

Annual rate of inflation, based on WPI on point-to-point basis stood at 4.85 per cent for the week ended 26^th May 2007 as compared to 5.06 per cent last week or 4.99 per cent last year.

Over the week WPI declined by 0.1 per cent to 211.7 from 211.9 for the previous week. Primary articles prices fell by 0.5 per cent due to price fall in fruits and vegetables, urad,bajra and condiments and spices. Fuel, Power, Light and Lubricants prices remained unchanged at the last week level of 322.0 and also the index of Manufactured products remained stable at 184.1

WPI index for all commodities were revised upwards for the weekended 31.3.2007 to 210.4 from 210.0. Inflation rate correspondingly changed to 5.94 from 5.74 per cent. 

BANKING

Seeking to exercise farmers’ distress, NABARD has designed Rs 2,000 crore plans aimed at helping them earn a supplementary income. As part of this strategy, a National Milk Plan would be launched in 325 districts across the country with the help from the National Dairy Development Board to ensure that every farmer gets a regular daily subsidiary income to overcome distress during crop failures. Nabard would also launch an innovative village adoption scheme in July for integrated and holistic development of villages to coincide with its silver jubilee celebrations. Initially Nabard proposes to adopt 400 villages, which would become a model for development and rope in the lead banks to expand this initiative. Nabard and the lead banks plans to implement this scheme in 1,200 villages every year.

Taking a cue from the west, the RBI and Indian Banks Association are planning to introduce a new debt instrument with a 30-year maturity period for banks. Companies, especially those in the insurance and pension sectors, which require long-term investments with reasonably high returns, would be ready takers for such an instrument. At present, the RBI allows banks to take the perpetual debt instrument route for raising resources. However, this has seen very few borrowers. The Indian banking industry would require huge capital in the next 5 years, to meet the stringent Basel II norms and carry on with their own expansion plans.

Standard & Poor’s (S&Ps) will adopt a three-level approach for rating the banking system from the first quarter of 2008. The first level would encompass a base case approach (BCA), which produces globally consistent capital changes by risk class and geographic region, based primarily on public disclosures. The next level would be based on specific case assessments (SCA), which produces globally consistent capital charges by risk class and geographic region using institution specific data. The SCA approach includes one-to-one discussions with institutions that possibly will lead to adjustments but will remain within the general BCA framework. The final layer would be based on economic capital assessment (ECA) which will assess the appropriateness and robustness of an institution’s internal models. This assessment will complement, not substitute for, the BCA and SCA. In the more than 100 countries planning to implement Basel II, S&Ps BCA will produce a measure of adjusted regulatory risk-weighted assets what will leverage on Pillar 3 disclosure.

Kochi-based JRG Securities, announced the launch of futures trading in Indian rupee contracts in the Dubai Gold and Commodity Exchange (DGCX), through the company’s subsidiary JRG Metals & Commodities DMCC. DGCX already trades in three currency contracts. The Indian rupee contract will enable individuals and companies to have the opportunity to hedge and trade their rupee risk on transparent and equal basis that an exchange provides.

Weak recoveries of small loan accounts may become a cause of concern for PSBs, which are getting aggressive with retail lending. Smaller loan accounts of up to Rs 10 lakh comprise about 75-80 per cent of their total lending portfolio. However, though banks have managed to put in place a solid mechanism for recovering of high-value loan accounts, the smaller ones are often neglected. This may lead to an increase in NPAs for the banks in the next few years. A host of private sector banks have outsourced recovery activities while most public sector banks do it themselves. Now PSBs may look at outsourcing these activities to increase the overall efficiency.

CORPORATE SECTOR

The country’s largest car manufacturers, Maruti Udyog had brought down overall energy consumption at its Gurgoan plant by 26 per cent in the last 6 years. The company managed to reduce per vehicle power consumption by 31 per cent and water consumption by 67 per cent during this period. CO2 emissions per vehicle (produced during manufacturing) have also been brought down by about 39 per cent in the last 5 years. The benefits to the overall value chain are much higher, as MUL has worked in collaboration with its suppliers to implement the best environment practices at their facilities.

A global force in Aluminium business, Aditya Birla Group is now targeting a bigger presence in carbon black business. The $24 billion group has decided to set up greenfield projects in Oman and Mexico . The group is trying to consolidate its status as the fourth largest producer of carbon black globally, with a capacity of 7,35,000 tonne across Thailand , Egypt , China and India . Carbon black is one of the most profitable businesses within the group.

Sony India Private Ltd., part of Sony Corporation of Japan, is considering the option of setting up an R&D centre in India for its high definition (HD) products, including digital cameras, camcorders and colour televisions as part of its ‘global localisation’ plans. The main objective behind this is to facilitate the transfer of technology from which India will gain newer HD products. Group Company Sony Ericsson is also planning to shift part of its R&D work to India .

Maruti-Suzuki’s latest offering, the SX4 that was launched in May 2007 has bring down the six-year dominance of Honda City in the very first month. In May Suzuki SX4 sold 3,000 units against 2,838 units sold by Honda City. According to Honda the decline in sales is only transitional and it will fight to retain its segment dominance.

The Kerala government has issued a show cause notice to Tata Tea on the charge that company has been holding land for plantation on which it has no legal ownership. The documents furnished by Tata Tea Company also reveal that the company now holds land in excess of what it is legally entitled to.

In a strategic move, FMCG major Marico has entered into the healthcare services sector by launching ‘Kaya Life Centre’, a chain of professional weight control centres. To start with, Marico is setting up its first ‘Kaya Life Centre’ in Mumbai and plans to extend its new initiative to other major metros across the country.

IBM announced a new initiative to provide energy saving products and services to its clients in India , in the process joining the ranks of ‘environment-friendly’ companies like HP, Dell, Intel and Sun who have decided to cut their green house emissions up to 20 percent before 2012. As a part of the Big Green project IBM will provide new technologies to its clients that will help conserve 5 billion KW hours of energy and cut data centre energy cost by half. IBM claims its initiative is different from others in that it sees the power and cooling issue at the data central level whereas HP and Sun provide it at the product level.

Essar Global Ltd has received approval from the Canadian government for acquisition of Algoma Steel Inc for over Rs 7,098 crore (Canadian $1.85 billion), as required under the country’s foreign-investment rules. The company had obtained approval through its wholly owned subsidiary Essar Steel Holdings Ltd under the Investment Canada Act. The regulators approved the deal after Essar agreed to keep the Canadian steel company’s head office in Sault Ste Marie , Ontario and ensured a boost in annual capital expenditures.

FINANCIAL MARKETS

Capital Markets

Primary Market

Nelcast Limited has tapped the market between June 4 and 8 by  issuing equity Shares aggregating Rs. 43.50 Lakhs, share of Rs 10 each in a price band of Rs 195-219  per share.

Meghmani Organics Limited has tapped the market between June 4 and 7 by issuing equity Shares aggregating Rs. 102 crores in a price band of Rs 17-19 per share.

Secondary Market

The market was weak, last week, as Sensex declined in four out of the five trading sessions. A whole host of factors right from weak global markets, large IPO’s in pipeline sucking out liquidity, fears of rate hike, and lack of fresh buying weighed on the indices. Volatility was to fore in the entire week.

The benchmark index, BSE Sensex lost 507 points or 3.61 per cent to 14,063.81 in the week ended Friday, 8 June 2007. The S&P CNX Nifty shed 152 points or 3.66 per cent to 4,145 in the week ended 8 June 2007.

The week started on a bearish note with the Sensex declining 74.98 points, to 14,495.77 on Monday, 4 June 2007. A sharp fall in Chinese markets weighed on domestic bourses with shares from auto and IT pivotals attracting heavy selling.

Sensex gained 39.24 points to 14,535.01, a day later, following a strong recovery in markets across the globe, led by rebound in China . Buying was seen in IT, banking stocks and in select pivotals.

On Wednesday, 6 June 2007, Sensex plunged 279.08 points at 14,255.93, as fresh selling emerged at fag end of the day. All the sectoral indices on BSE settled with losses, with shares from PSU, banking and oil & gas space bearing most of the brunt.

Sensex lost 69.75 points to 14,186.18, on Thursday, 7 June 2007, tracking weak global markets. However buying support was seen in IT pivotals.

The correction continued for the third straight day, with the 30-share BSE Sensex losing 122.37 points to 14,063.81 on Friday, 8 June 2007. Weak global markets triggered fall on domestic bourses.

Derivatives  

The Nifty June 2007 futures settled at 4,124, a discount of 21 points compared to the spot closing of 4,145.                               

Government Securities Market

Primary Market

RBI conducted the auction of "7.49 per cent Government Stock 2017" and "8.33 per cent Government Stock 2036" for the notified amounts of Rs.6000 crores and Rs.3000 crores respectively. The cut-off yields for the "7.49 per cent Government Stock 2017" and "8.33 per cent Government Stock 2036" were 8.1762 per cent and 8.5207 per cent respectively.

RBI conducted the auction of "6.65 per cent Government Stock 2009" for a notified amount 6 month USD LIBOR 5.40 5.38 of Rs.5000 crores under MSS. The cut-off yield of the security was 7.9583 per cent.

The cut-off yield in 91-day T-Bill auction moved lower to 7.2274 per cent as against 7.3937 per cent during the previous week. The cut-off yield in 364-day T-Bill auction moved lower to 7.6869 per cent as against the previous cut-off yield of 7.8032 per cent.

Secondary Market

During the week, the weighted average call rates during the period ranged between 0.28per cent and 0.54 per cent, while weighted average repo rates ranged between 0.19 per cent and 0.23per cent and the weighted average CBLO rates ranged between 0.1 per cent and 0.3 per cent. The average volumes of Call, Repo, and CBLO segments were Rs.6195.27 crores, Rs.6733.47. crores and Rs.12590.983 crores respectively. The daily average outstanding amount in the LAF (reverse repo) operation conducted during the period was Rs. 2988.8 crores. The weighted average YTM of G.S 2017 8.07 per cent bond was 8.1901per cent on June 08, 2007 as compared to 8.1242 per cent on June 01, 2007. The 1-10 year YTM spreads increased by 48 bps to 72 bps

Bond Market

Power Finance Corp has tapped the market to mobilise Rs 150 crore by issuing bonds and offering 9.90 and 10 per cent respectively for 3 and 5 years.

Foreign Exchange Market

The rupee closed at Rs.40.98/USD on June 08, 2007 as compared with Rs. 40.54/USD as on June 01, 2007. The Rupee moved between Rs. 40.47 and Rs.40.98, with a standard deviation of 20 paise during the week. Similarly during the fortnight (May 28, 2007 - June 08, 2007), the Rupee moved between Rs.40.45 and Rs.40.98, with a standard deviation of 15 paise. The Rupee moved between Rs.40.45 and Rs.40.98 during the last 1 month (May 14, 2007 -June 08, 2007), with a standard deviation of 16 paise.

The six-month forward premia closed at 2.41 per cent (annualized) on June 08, 2007 vis-à-vis 2.58 per cent on June 01, 2007.

Commodities Futures derivatives

The newly-appointed chairman of the Forward Markets Commission (FMC) BC Khatua, said, without waiting for the approval of the amendments to the Forwards Contracts (Regulations) Act, 1952, (FRCA), the existing powers under the act would be fully utilised to effectively regulate commodity markets so that the basic objective of permitting commodity trading-- price discovery and risk management-- are fully met.

The Ahmedabad-based National Multi-Commodity Exchange (NMCE) is all set to launch futures trading in turmeric of the ‘Erode’ variety .

The exchange obtained the regulator’s approval last week to introduce turmeric futures initially in four series for their expiry in August, September, October and November. The contracts for each new month would open on the 10th of the month or previous day in case 10th is a non-trading day.

Traders would be permitted to square off their position between 17th and 20th of the delivery month as the contracts expire on 20th. No fresh positions will be allowed during these days. And, if the 20th of the delivery month happens to be holiday, delivery will be due on the previous day.

The exchange is hoping that the Erode variety will repeat the performance of the Nizamabad-origin turmeric, which contributes Rs 4254 crore every month to the National Commodity and Derivatives Exchange (NCDEX).

Kochi-based JRG Securities, announced the launch of futures trading in Indian rupee contracts in the Dubai Gold and Commodity Exchange (DGCX), through the company’s subsidiary JRG Metals & Commodities DMCC. DGCX listed the futures contract on Indian rupee on June 07,2007.

Indian rupee is going to be traded in the global futures market for the first time .The Indian rupee contract will enable individuals and companies to have the opportunity to hedge and trade their rupee risk on transparent and equal basis that an exchange provides.

Each DGCX Indian rupee contract represents Rs 20 lakh. Prices will be quoted in US cents per Indian Rs 100, with a minimum price fluctuation of $0.000001 per rupee ($2 per contract).

JRG has set up a trading infrastructure in the Middle East offices for global investors to trade in Indian rupee contracts.

Leading commodity and stock bourses have shown an interest in starting currency futures on their trading platforms.

The National Commodity and Derivatives Exchange (NCDEX), the National Stock Exchange (NSE) and the Clearing Corporation of India Limited (CCIL) have applied to the RBI for permission to start dollar-rupee futures in India.The Reserve Bank of India’s (RBI) internal committee is currently studying the proposal. Even Financial Technologies, the promoter of the Multi Commodity Exchange, has sought permission to launch the product.

Trading in currency futures is not allowed in India . The commencement of currency futures will allow importers, exporters and foreign investors to hedge their currency risks in India itself. The Dubai Gold and Commodities Exchange (DGCX) has started rupee futures trading from on Thursday.

Experts are of the opinion that the Reserve Bank can permit currency futures under the present structure. In its credit policy statement in April, the RBI had announced the setting up of a working group on currency futures to study the international models and suggest a suitable framework, in line with current legal and regulatory systems.

The food ministry wants private procurement agencies to have five-year business record.

Private agencies looking to procure foodgrains on behalf of the government will now be able to do so only if they have an experience of five years in agriculture-related business, according to a recent policy formed by the food ministry. This prevents companies promoted by mainline commodity exchanges for the purpose of procurement and other allied activities from procurement services.

INFORMATION TECHNOLOGY

Indian software companies on an average get 60 per cent of their revenue from the US . Rising rupee may force IT companies to revise their annual earnings guidance downwards. Every 1 per cent appreciation in the rupee against the dollar can impact earnings before interest and tax margins by between 30 and 50 basis points. Companies may still be able to offset the appreciating rupee impact by increasing their utilization and pricing.

*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

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