Market Watch Sep 21 - Sep 25

Market Analysis

After stellar gains for the last two consecutive weeks (of 3.7% and 2.9%), the Indian markets lost some steam this week, logging in a loss of 0.3% for the week. But this comes in the backdrop of much higher declines in almost all other major indices around the world. The benchmark BSE Sensex hit a 16 month high on Tuesday, but subsequently lost the momentum to finally close the week on a marginally negative note. The Indian markets were under pressure from the weak cues emanating from the global markets. The markets closed at 16693 on Friday down by 48 compared to the last week. The broad based Nifty also closed lower compared to the last week at 4959 points.

Macro Economy

The rate of inflation more than trebled in the second week of September from its previous level as prices of daily essentials and raw food items appreciated sharply from levels prevailing a year ago. Inflation stood at 0.37% for the week ended September 12, up from 0.12% a week before when it had moved into positive territory after a space of 13 weeks. Overall, prices of raw food items increased 15.64% yearon-year during the week

under review, driven mainly by a 44.85% rise in vegetable prices. Potatoes led the list of raw food items that turned costlier at 75%, followed by pulses at 21% and rice at 17%. Processed food items continued their rising trend, with prices rising 12.68% from the year-ago level. Sugar turned dearer by 43.35%. From a weekly perspective, however, the rise in prices of

essential food items does not appear sharp except for freshwater fish which became costlier by 11%. Other food items rose in the range of 1-2% or saw a decline. The rise in inflation for the week comes despite a high base of 12.42% a year ago. Though at 0.37%, inflation does not seem too high as the rate of price rise is measured only on a yearly basis in India, the inflation rate has already crossed the psychologically important 5% mark for this fiscal so far. Rupee become marginally stronger compared to dollar from last week and was trading at Rs. 48.47 per dollar. The yellow metal on the other hand shed some shine to end at Rs 15800 per 10 grams.

Sectoral Performance

Coming to the performance of sectoral indices in India, the various indices had their fair share of both losers and gainers. The pack of gainers was led by pharmacy stocks, with the BSE-Healthcare Index ending higher by about 7.6%. The pharmacy stocks were followed in their gains by stocks forming part of the realty and FMCG sectors. Amongst the losers during the week were the BSE-Metal and BSE-IT which ended lower within a range of 3% to 3.5%. This is almost the opposite of last week, when the metal and IT spaces had performed well, and the pharma and FMCG sectors had seen comparatively much lower gains.

Market watch - Sep 14 to Sep 18

Market Analysis

Recording their consecutive weekly gain, the Indian markets were one of the top gainers amongst key markets worldwide. The benchmark index BSE Sensex ended the week higher by around 2.9% to close at 16741 points. Lesser worries about the shortfall of monsoon and high FII inflows (net investment of Rs 53 bn. during the week) are believed to be the key

reasons for the same. In fact, the net FII inflow on Friday i.e. September 18 itself stood at about Rs 27 bn.

Macro Economy

India's wholesale price index (WPI) came in a tad below the zero mark in the year to September 5 at 0.08%. This was little changed from the previous week's fall of 0.12%. The general consensus is that the figure is likely to turn positive in the coming weeks. This is not very surprising considering that crude prices have rebounded from their lows and that

deficient monsoons have hampered crop production thereby inflating food prices. The food articles index rose 14.8% in the year to August 29 and the CPI over the last year has stayed stubbornly high. It may be noted that the RBI has revised its WPI forecast for the end of FY10 to 6% from 5% predicted in July. If that turns out to be true, the likelihood of RBI

putting the brakes on its expansionary monetary policy cannot be ruled out. Rupee closed at 48.93 per dollar. The yellow metal was trading at Rs. 16045 per 10 grams.

Sectoral Performance

Coming to the performance of sectoral indices in India, barring stocks from the oil & gas space, buying activity was witnessed across sectors. The pack of gainers was led by auto stocks, with the BSE-Auto Index ending higher by about 8%. It was followed by stocks forming part of the metal and IT sectors. While the BSE-Metal Index ended higher by 7%, the BSE-IT Index ended higher by 4%. Amongst the lowest gainers during the week, were

the BSE-FMCG, BSE-PSU and BSE-Healthcare indices which ended lower within a range of 1% to 2%. The BSE-Oil & Gas Index ended the week lower by 1.5%. However, during the previous week, this index ended higher by about 5%.

Global Cues

As far as global markets are concerned, most of the Asian markets ended the week lower, while the Americas and Europe recorded gains. Leading the pack of gainers was Brazil, which recorded a gain of 4%. UK, France and US followed suit recording gains of 3%, 2.5% and 2.2% respectively. Singapore, China and Japan ended the week on a negative note, down

by about 1% each.

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Carbon Trading

CARBON TRADING
Over the last hundred years, the amount of carbon dioxide in the atmosphere has increased by 28 percent (and analysts estimate that it could rise by more than 40 percent in the next hundred years) due to increased global emissions. To check the increasing menace of greenhouse gases, Kyoto Protocol was adopted for use on 11 December 1997 in Kyoto, Japan and which entered into force on 16 February 2005. The Kyoto Protocol has created a mechanism under which countries that have been emitting more carbon and other gases have voluntarily decided that they will bring down the level of carbon they are emitting to the levels of early 1990s ( 5.2 % below).
The six greenhouse gases to be limited are:
 Carbon dioxide
 Methane
 Nitrous oxide
 Hydro fluorocarbons
 Per fluorocarbons
 Sulphur hexafluoride
The Protocol provides for three mechanisms that enable countries or operators in developed countries to acquire greenhouse gas reduction credits
 Under Joint Implementation (JI) a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country.
 Under the Clean Development Mechanism (CDM) a developed country can 'sponsor' a greenhouse gas reduction project in a developing country where the cost of greenhouse gas reduction project activities is usually much lower, but the atmospheric effect is globally equivalent. The developed country would be given credits for meeting its emission reduction
targets, while the developing country would receive the capital investment and clean technology or beneficial change in land use.
 Under International Emissions Trading (IET) countries can trade in the international carbon credit market to cover their shortfall in allowances. Countries with surplus credits can sell them to countries with capped emission commitments under the Kyoto Protocol
The size of each country's annual limit in the 2008-2012 period is expressed as a percentage of its emissions level as measured in 1990 (i.e. the baseline year). A company has two ways to reduce emissions. One, it can reduce the GHG (greenhouse gases) by adopting new technology or improving upon the existing technology to attain the new norms for emission of gases. Or it can tie up with developing nations using any of above methods. Under UNFCCC the polluters cannot buy 100 per cent of the carbon credits they are required to reduce.
All countries have been divided into Annex -1 (industrialized or developed) and non- Annex -1 (developing like India and China). Factories or farm owner in non Annex-1 countries can get linked to UNFCC and know the 'standard' level of carbon emission allowed for its outfit or activity. The extent to which they are emitting less carbon (as per standard fixed by UNFCCC) they get credited in a developing country. This is called carbon credit. These credits are bought over by the companies of
developed countries -- mostly Europeans -- because the United States has not signed the Kyoto Protocol.

Kyoto enables a group of several Annex I countries to join together to create a market-within-amarket. The EU elected to be treated as such a group, and created the EU Emissions Trading Scheme (ETS). The EU ETS uses EAUs (EU Allowance Units), each equivalent to a Kyoto AAU.
TRADING
Like any other asset, carbon credits are tradeable instruments with a transparent price; financial investors can buy them on the spot market for speculation purposes, or link them to futures contracts. A high volume of trading in this secondary market helps price discovery and liquidity, and in this way helps to keep down costs.
MCX (Multi Commodity Exchange, India) has entered into a strategic alliance with CCX (Chicago Climate Exchange) in September 2005 to initiate carbon trading in India. MCX can list its mini version of ECX Carbon Financial Instruments (CFI) and Chicago Climate Futures Exchange (CCFE)
Sulphur Financial Instrument (SFI) on the MCX trading platform.MCX is the futures exchange. The commodity traded on CCX is the CFI contract, each of which represents 100 metric tons of CO2 equivalents.
CFI contracts are comprised of Exchange Allowances and Exchange Offsets. Exchange Allowances are issued to emitting Members in accordance with their emission baseline and the CCX Emission Reduction Schedule. Exchange Offsets are generated by qualifying offset projects. People here are
getting price signals for the carbon for the delivery in next five years. The exchange is only for Indians and Indian companies. Every year, in the month of December, the contract expires and at that time people who have bought or sold carbon will have to give or take delivery. They can fulfil the deal prior to December too, but most people will wait until December because that is the time to meet the norms in Europe. People who are coming to buy from Indians are actually financial investors.
They are thinking that if the Europeans are unable to meet their target of reducing the emission levels by 2009 or 2010 or 2012, then the demand for the carbon will increase and then they may make more money.

Terms in brief:
CER (certified emission reductions (CERs) - One tonne of carbon dioxide reduced through the Clean
Development Mechanism (CDM) project, when certified by a designated entity, becomes a tradable
CER
UNFCC: United Nations Framework of Climate Change Convention (UNFCCC).
CCX: Chicago Climate Exchange, Inc.

Food Prices

The food prices have shot up significantly in the last couple of months and there is a 13.3% increase as compared to mid-August last year.

The government has been prompt and has reassured us that India has a huge buffer stock of 32.3 million tonnes of rice and 25.3 million tonnes of wheat. But prices have been climbing rapidly despite this, mainly because the government machinery has not moved quickly enough to release these buffer stocks in the open market. The surge in the food prices can be principally associated with the dismal monsoon this year.

The monsoon has been erratic to say the least and as expected the farmers are bearing the brunt of the monsoon’s uncertain behaviour.

In a bid to support them, SBI has announced an array of measures. These include reduction of interest rates and concession for borrowers who pay the loan within the stipulated period.

This measure should tone down the margin of the rise in food prices and also provide some respite to the farmers and in turn the consumers.

GANESH

Want to make a call? Use Tata’s CDMA phones.

In what has been described as a "game changer" Tata Teleservices has announced that it will do away with the pulse system for charging for a telephone bill. This will be applicable only for Tata's pre-paid CDMA customers.

What does that mean exactly?

This means that irrespective of the duration, the call will cost only a fixed amount.

Further, all those businesses which rely heavily on communication, will witness a decrease in their costs. Though this decrease is not expected to be significant as compared to the profits or revenue of the business, it will nevertheless cut down on their operating costs. If this concept is extended further to international calls, the foreign trade industry will be benefitted to a very large extent.

Since the change is applicable to all markets and segments, there would not be an advantage to anyone in particular.

Ganesh

Mortgage Backed Securities + Securitization

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