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While the BSE Sensex almost doubled for the fiscal year ended Mar’04 with a gain of 81% both the benchmark indices declined by 5.62% in the last quarter.

The market remained under pressure over liquidity concerns ahead of the IPO season. Despite the slow start all the public offers issues got oversubscribed indicating abundant demand for the stock both by the domestic as well as foreign investors. Liquidity crunch ahead of the deadline of advance tax payment and year-end concerns and uncertainty regarding the upcoming Lok Sabha elections also effect market sentiments negatively.

Bullishness about the strong economic growth however, has kept the market fundamental intact. The 10.4% increase in the India's GDP in the 3rd quarter of 2003-04 has made India the fastest growing Asian country, replacing China. The unabated overseas investment even with high volatility and pipeline of large equity issues has boded well for market.

IT stocks were the biggest losers during the quarter. The worries for the sector continued on the increasing US outcry over outsourcing from India and no major signs of recovery in the US economy. Pharma and banking stock
declined across the board while auto, steel, metal and media sectors exhibited diverse trends. Cement stocks hogged the limelight on reports of impending price hike in near future while basic, power and oil stocks were among
the biggest out performers on the back of the IPO series.

The glut in liquidity prevailed for the whole of the quarter with auction outflow and state loans hardly denting the systemic liquidity in the money market. The overnight interest rates ranged soft below repo rate at 4.00-4.50%.
With continuous forex inflows and the healthy liquidity condition, the investment in the LAF Repo auctions struck new highs, first in January at Rs 47,720 crore and again in March at Rs 55,475 crores.

Gilts prices regained to their quarter start levels in March after weakening for the first two months of the quarter under review. Lack of buying interest amid unclear directions pushed yields to their 5-month highs in February.
Also, the rising global interest rates aggravated selling. The ambiguities on the MSF further impacted sentiments.

But, RBI’s assurance on the liquidity front along with bargain buying reversed the downtrend and aided prices to inch up gradually. Burgeoning liquidity applied downward pressure on yields. Though smart gains were met by profit selling, the much-awaited new fiscal’s issuance calendar along with MSB details aided gilts to rally afresh.

The sustained fall in the inflation rate further stimulated upbeat sentiments. The yield on the 10-year benchmark rose to touch a high of 5.36% from 5.13% at the start of the quarter, but eased to end the fiscal year 5.15%.
The bond market, hit hard by regulatory changes introduced in Q3 of the fiscal, did not improve till the later half of Q4. There was speculation that interest rates had bottomed, which pushed up the benchmark 5-year AAA yields to 6.0 percent from 5.44 percent. The spread rose to near 1 year highs of 98 basis points. Activity in bonds improved in the later half of the quarter on the back of liquidity and generally improved sentiment. The benchmark yield eased
to 5.58 percent and its spread over risk-free narrowed to 81 bps.

Rupee appreciated 4.87 percent against the dollar to 43.38 in the last quarter of the fiscal. Foreign investment inflows were strong but it was the absence of public-sector banks' dollar support that allowed the rupee to gain. In 11 weeks to mid-March, INR appreciated a meagre 0.79 percent due to persistent dollar buying by PSBs. These banks reduced their dollar purchases drastically in late March.

- During the quarter under review, mutual funds produced barren returns in trend with the bearish equity market and sluggish debt market. However, the debt funds with lesser risk and volatility managed to pip the equity funds this quarter.
- After a strong performance in the Dec’03 quarter (32%), the returns of the equity-oriented funds settled in the range of (-ve) 6-8 % for the quarter ended Mar’04. The relatively sharper fall in equity market dented the popularity and performance of these schemes. The gloss associated with their performance in recent months is, consequently, starting to wear thin.
- Though, diversified equity funds logged negative returns in the 3 months to the quarter, they consistently out performed the benchmark index BSE Sensex and the S&P CNX Nifty. Incidentally Index funds that track the benchmark indices, because of their passive investment style, not only outperformed the underlying index but also gave better returns than the diversified equity fund.
- Among the Sector funds, IT funds were the worst hit with the growing backlash on outsourcing from India in US and the fall on the tech heavy NASDAQ becoming a regular feature. FMCG, pharma and MNC funds were also among the major losers. With oil & PSU stocks skyrocketing on the back of successful IPOs, basic and other specialty funds out performed the plain vanilla funds by a large margin.
- Among the hybrid class of funds, MIP funds continued to out perform the balanced funds. With the last quarter of the fiscal year viewed as more of tax planning than pure investments, ELSS schemes managed to beat the diversified funds marginally.
- Funds with higher allocation to long term gilts generated higher positive quarterly returns than the previous quarter while their short term counterparts witnessed a fall in returns by around 0.09%. On the other hand, bond funds both with short-term maturity and long term tenor witnessed a drop in average return as compared to the previous quarter. Institutional LT bond funds however, bucked the trend to see higher average return this quarter.
- Liquid funds were the best performing category for the quarter. Though Liquid funds continued to generate steady returns around the Repo rate they saw a drop in average return by nearly 0.30%. The Institutional plan under the category continued to outperform the normal plan with larger scale of corporate investments.

Going Forward
- With the uncertainty of huge IPO’s fusing out and consistent inflows from overseas, equity market looks on a path to recovery. Equity-oriented funds are likely to comeback riding the rebound in the underlying stocks. However, volatility and risk for these schemes shall also be at its high on account of upcoming election. Hence, a long-term investment in equity funds will be the most beneficial investment strategy.
- Debt funds on the other hand are unlikely to see higher return given the scenario in the debt market with low interest rate and high volatility. Liquid funds would give steady returns but on the lower side. The hybrid class fund with more of equity component may generate better returns.