Bull liquidation in the derivatives segment has only compounded losses in indices in the cash market, which is already in the throes due to the overall international political clime.

The result is a sharp setback over the last few trading sessions, notwithstanding the market friendly Union Budget 2003-2004. The barometer 30-share BSE Sensex lost 175.42 points or 5.3% in nine trading sessions since the Union Budget (on 28 February 2003) to 3,108.24 from 3,283.66. The S&P CNX Nifty plunged 63.75 points or 5.99% during the same period.

Fears of an imminent US-Iraq war have been the predominant factor weighing down indices since the Union Budget.

Bull liquidation in the derivatives market also contributed largely to the decline. Earlier, ahead of the budget, traders had built up large positions in the derivatives segment as they felt that the Union Budget would trigger a rally in indices. On the contrary, the market was hurt considerably by the prospect of war breaking out in West Asia. This, in turn, led to liquidation of positions in the derivatives segment and impacted the cash markets as well.

According to dealers, there has been substantial liquidation of `long' positions in the futures markets. Long positions are held by traders/operators who expect the price of a stock or the index (both stock specific and index based futures are permitted in the derivatives segment) to rise. Earlier, there were substantial positions in stocks like Reliance Industries, Telco, HPCL and Tisco. Substantial unwinding of positions is said to have taken place in stocks like RIL, Telco and HPCL. In RIL, the positions have come down to very low levels, according to dealers. However, a fair amount of `long' positions still exist on the Tisco counter.

The prospect of war breaking out in West Asia has affected bourses even as the Union Budget 2003-2004 proved investor-friendly what with measures like the abolition of dividend tax in the hands of investors and the withdrawal of long term capital gains tax on equities bought from 1 March 2003 to 1 March 2004. The capital gains tax exemption on equity investment will be reviewed in the next budget. The cut in surcharge on corporate tax from 5% to 2.5% is another favourable development. The imposition of the 12.5% dividend distribution tax, however, has been a damper, but its impact on corporate bottom lines won't be significant, it is held.

IT stocks have been the biggest losers. In the last nine trading sessions, the BSE IT sector index has dived 124.61 points or 8.2% to 1,379.39. IT stocks lost ground primarily due to the turmoil in the global equities markets. This inspite of the restoration of 100% tax benefit on export profit of software units located in software technology parks/software zones. The market had actually been worrying that the government would in fact reduce such tax benefits. In Union Budget 2002-2003, then finance minister Yashwant Sinha had lowered 100% deduction of export profits to units existing in trade zones to 90%. The 10 A/10 B benefits are available for software units set up before 2010.

Tisco has been another big loser. The scrip has lost 9.9% in nine trading sessions after the budget to Rs 135.15 on 13 March 2003. Huge outstanding positions in the stock in the derivatives segment continue to weigh down the stock. The weakness in the stock also comes amid concerns that Asian steel prices, which surged sharply in the last one year, may soon peak out due to a surge in inventories especially in Japan even as demand remains strong from China and Korea.

Among auto shares, Telco, Mahindra & Mahindra and Ashok Leyland have declined despite the budget's sharply cutting excise duty on utility vehicles and cars by 8%, from 32% to 24%. A thrust on infrastructure and new road projects worth Rs 40,000 crore (Rs 400 billion) indirectly benefit commercial vehicles.

The market is wary of the potential war. Iraq, being a leading oil exporter, market men are worried that war will hamper oil supplies and prompt an oil price spiral. It is a historical fact that rising oil prices tend to send economic activity in reverse gear. Markets across the globe have whittled down as a result of that prospect.

If war breaks out and lasts for a prolonged period, the already fragile economies of the world would be hurt further. Stock prices may plunge as well. Escalating oil prices would prove burdensome for key industries like automobiles and petrochemicals.