The threat of a new recession is rising in the United States, economists say, as they slash their growth forecasts for the second half of the year.

Slowing global expansion, the plunge in US stock markets after Standard & Poor's cut the country's credit rating, and political pressure on the government to cut spending rather than stimulate growth are all putting the brakes on the world's largest economy, they say.

Mostly negative data -- though with a few bright spots -- has reinforced feelings that the recovery from the 2008-2009 recession is in trouble.
And the Federal Reserve's own warning last week of increased "downside risks" to growth in the second half has added to the gloomy picture.

Mark Zandi, the top economist for Moody's Analytics, said Monday they had cut their growth outlook for the second half to 2.0 percent, from a 3.5 percent forecast just last month.

"The near-term economic outlook is significantly weaker than it was just a month ago," he said in a new report.

"The odds of a renewed recession over the next 12 months are one in three, and rising with each 100-point drop in the Dow."



Goldman Sachs said the economy appeared to be moving at less than "stall speed" after, at best, a mere 0.8 percent growth in the first half.

"With growth clearly below trend, the unemployment rate has crept up slightly, suggesting the possibility of a self-reinforcing deterioration in the economy," Goldman said -- also predicting a 33 percent chance for a recession.

A raft of poor economics statistics -- on second quarter growth, layoffs and job creation, industrial production, consumer spending, and consumer and business sentiment -- underpin the lower projections.

On Friday, a University of Michigan survey showed consumer sentiment at its lowest level since May 1980.

And on Monday, the Fed's New York manufacturing survey for August also took a sharp downward turn.

The Fed gave no sense of optimism last week when it announced it would keep interest rates at ultra-low levels for two more years because of the weak economy.

After a one-day meeting, the US central bank's policy board forecast growth at a "somewhat slower pace" over the coming quarters than it had estimated in June.

"Downside risks to the economic outlook have increased," it added.

The United States lost its top-notch AAA credit rating from Standard & Poor's on Friday in an unprecedented reversal of fortune for the world's largest economy.

S&P cut the long-term US credit rating by one notch to AA-plus on concerns about the government's budget deficits and rising debt burden. The move is likely to raise borrowing costs eventually for the American government, companies and consumers.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said in a statement.

The decision follows a fierce political battle in Congress over cutting spending and raising taxes to reduce the government's debt burden and allow its statutory borrowing limit to be raised.

On Aug. 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S&P had called for as a good "down payment" on fixing America's finances.

The White House maintained silence in the immediate aftermath of S&P downgrade.

The political gridlock in Washington and the failure to seriously address U.S. long-term fiscal problems came against the backdrop of slowing U.S. economic growth and led to the worst week in the U.S. stock market in two years.

The S&P 500 stock index fell 10.8 per cent in the past 10 trading days on concerns that the US economy may head into another recession and because the European debt crisis has been growing worse as it spreads to Italy.

US Treasury bonds, once undisputedly seen as the safest security in the world, are now rated lower than bonds issued by countries such as Britain, Germany, France or Canada.

'DAUNTING' IMPLICATIONS

As the focus for investors shifted from the debate in Washington to the outlook for the global economy, even with the prospect of a downgrade, 30-year long bonds had their best week since December 2008 during the depth of the financial crisis.

Consumers all but shut their wallets in the second quarter, causing the U.S. economy to grow at a tepid pace.

To make matters worse, growth in the first quarter was much slower than initially thought, according to new government figures released Friday.

"It's quite worrisome as the economy remains at stall speed in the second quarter," said Sal Guatieri, senior economist with BMO Capital Markets. "If that continues, then it would raise the risks of a double dip."

Gross domestic product, the broadest measure of the nation's economic health, rose at an annual rate of 1.3% in the second quarter, the Commerce Department said.

While that's an increase from the revised 0.4% growth rate in the first three months of the year, it is hardly good news. The government originally reported that the economy grew at a 1.9% annualized rate in the first quarter.

The growth in the second quarter was also below the 1.8% increase expected by economists surveyed by CNNMoney.

Dubbed a "soft patch" by economists and even Federal Reserve Chairman Ben Bernanke, the economy's sluggishness was due to a variety of factors that weighed on consumers and businesses.

Higher gas prices for one, hit Americans hard when they peaked at a national average of $3.98 a gallon in May.

Top 10 consumer complaints

Overall, consumer spending, which accounts for roughly 70% of gross domestic product, picked up only 0.1% in the second quarter -- marking a significant slowdown from growth of 2.1% in the first three months of the year.

"The major disappointment in the report was the weakness in consumer spending, and it wasn't just fewer automobiles being sold due to Japan's earthquake. There was broad-based softness in consumer spending." Guatieri said.

It marked the slowest growth in consumer spending since the fourth quarter of 2009.

Looking back further, it also now appears that American consumers had less disposable income than originally thought from 2007 through 2010, whereas corporate profits were revised significantly higher for 2009 and 2010.

The government revised the GDP data back to 2003 and also found the recession was worse than originally thought.

Overall, the theme of the U.S. recovery continues to be one driven by companies holding cash on the sidelines and building up their infrastructure, rather than a recovery driven by consumers.

Americans on Main Street continue to be held back by slow job growth and the housing slump, even as major companies report strong profits and have mostly solid balance sheets.

Where the jobs are

According to the latest GDP report, investment in commercial real estate surged 8.1% in the

second quarter, and business spending on equipment and software rose 5.7%.

Meanwhile, exports rose 6%. The U.S. continues to import far more goods and services than it exports to foreign countries, but because imports grew at a slower rate of 1.3%, that also contributed positively to GDP.

The aftermath of Japan's earthquake and tsunami may have been one of the major reasons import growth slowed, as the U.S. bought fewer auto parts from the country.

Friday's GDP report also sparked cries from economists for lawmakers to act quickly in raising the debt ceiling and agree to a deal to cut the national deficit over the long term.

"We don't expect a recession, but if policymakers drag their feet -- which they are doing -- it will be a little more likely," said Paul Dales, senior U.S. Economist for Capital Economics.

Guatieri said: "If the government does not raise the debt ceiling and is forced to cut back spending and Social Security checks, that could undermine consumer spending even further."

That's the $14.3 trillion question as each day ticks closer to next week's debt ceiling deadline and Congress shows no sign of brokering a deal.

If lawmakers fail to raise the ceiling by Tuesday, the Treasury Department has said it will no longer be able to guarantee that it can pay all the country's bills in full and on time.

That's because Treasury will not be taking in enough revenue to cover all the bills coming due in August. And without a debt ceiling increase, it will be prohibited from borrowing new money in the bond market to make up the difference.

So, something will have to give.

The consensus thinking has been that Treasury will prioritize who to pay first and who to put off. And at the top of the list of who gets paid will be investors owed interest on U.S. debt. If the investors aren't paid, that would constitute a default, which would have a host of negative consequences for the country.

Of course, it's possible Treasury may decide it doesn't actually have the authority to prioritize and will instead pay interest owed to bond investors but pay other bills as they come due -- first come, first served, said former Treasury official Jay Powell, who coauthored a Bipartisan Policy Center report on the consequences of not raising the debt ceiling.

Assuming, however, that Treasury believes it has the authority to prioritize, it's not clear yet who will be paid first alongside investors. The Treasury has said it will provide more information as Tuesday approaches, and Republican Sen. Orrin Hatch has requested that the department turn over its plan by 5 p.m. on Thursday.

The plan, however, isn't likely to make anyone feel better.

Will I get my Social Security check?

That's because everyone to whom money is owed besides bond investors have either qualified for federal benefits, provided goods or services to the government, are serving in the military or otherwise work for Uncle Sam. Money will also be due to agencies to which Congress has legally appropriated money to run federal programs.

On deck to be paid every month: retirees, veterans, business owners, federal workers, active-duty soldiers, Medicare physicians and government agencies that need money to keep the lights on, to name just a few.

"While at midnight on August 2nd we don't all turn into pumpkins," White House spokesman Jay Carney said in a press briefing, he described the process of picking who to pay and who to put off as a "Sophie's choice."

How the math might work: The Bipartisan Policy Center estimates that Treasury will be short by about $134 billion for the month of August.

That cash deficit will build steadily throughout the month.

So, on Aug. 3, for instance, the center estimates that Treasury will take in $12 billion in revenue and have to pay out $32 billion, creating a $20 billion cash deficit. Among the biggest bills due that day: $23 billion for Social Security payments, $2.2 billion for Medicare and Medicaid payments, and $1.8 billion due to defense vendors.

On Aug. 4, the group estimates that the cash deficit will increase to $26 billion, with only $4 billion in revenue coming in, compared to $10 billion in bills, the largest of which would be for Medicaid and Medicare.

Come Aug. 5, the cash deficit grows another $5 billion to $31 billion.

By Aug. 15, the Bipartisan Policy Center estimates that the running cash deficit will hit $74
billion. That day the Treasury will take in an estimated $22 billion in revenue and have to pay out roughly $41 billion. The biggest bill that day is a $30 billion interest payment.

Cash on hand: What's not yet clear is how much cash Treasury might have on hand going into August.

The Bipartisan Policy Center estimates it might have enough, in theory, to pay bills in full until Aug. 10.

Even if that's right, however, Treasury may still decide to withhold some payments sooner to preserve cash to ensure it can make interest payments after Aug. 10.

It may also keep some cash on hand to ensure it can make principal payments on bonds coming due after Aug. 10.

Treasury will be able to hold bond auctions to roll over existing debt as it matures -- more than $450 billion is expected to come due in August.

However, if there isn't enough demand for Treasuries because of the uncertainty the political crisis in Washington has caused, those auctions may fail to raise all that Treasury needs to pay the principal due.

So Uncle Sam would have to pony up using the revenue coming in. That would mean even less money available to pay seniors, vets, small business owners and others who are part of the lifeblood of the U.S. economy.

Greece's recently approved austerity plan might not resolve deeper questions over how the country will repay its debts beyond this summer, but it appears one of the world's biggest investors still has faith in the country and and the greater eurozone. After all, it would be too risky not to.

Earlier this week, just days before the Greek Parliament approved austerity measures amid talks of a possible default, China said it would keep investing in Europe's sovereign debt. Premier Wen Jiabao told reporters that the country actually increased the purchase of government bonds of some European countries and hadn't scaled back its euro holdings.

These acts "show our confidence in the economies of Europe and the eurozone," he said.

China's backing isn't all that surprising. It was only earlier this year when the Asian giant supported debt-ridden Spain by signing $7.3 billion in deals that included investments in everything from energy to banking to oil. And it was around this time last year that China pledged to make more than a dozen major commercial contracts for business in Greece.

The value of these purchases may very well be in flux amid debt problems that have put many investors on alert, but that's beside the point of China's voracious appetite. China has more to gain than lose by investing in Europe's future. Even as misery and uncertainty mounts in the region, the eurozone is still China's largest export market (accounting for roughly 20% of total shipments) and it's in its own interest to contain the crisis.

"They're not really concerned about short-term volatility," says Domenico Lombardi, senior fellow specializing in international monetary relations and global currencies at Brookings Institution.

Besides, as China expert Barry Naughton of the University of California in San Diego, pointed out earlier this year: The risks are relatively low since the European Union and the European Central Bank will likely swoop into the rescue if things get really bad.

Wednesday's $41 billion worth of budget cuts and asset purchases was part of a large-scale bailout launched last year to help debt-troubled Greece pay its loans. The European Union and the International Monetary Fund had required Greek lawmakers to pass the plan before releasing its next round of rescue payments.

China's foreign-exchange reserve, worth more than $3 trillion, is by far the biggest in the world and is viewed by politicians and corporate executives as a key source of capital. It's unclear just how much China has boosted its holdings of European bonds, as leaders keep the breakdown of its holdings secret. But just by saying it will invest in Europe, China indirectly calms markets and helps stabilize the euro, and in a way, sends a message to the world at large that it's a good global neighbor willing to help in times of crisis.

Longer-term, the Chinese have been looking to diversify its massive reserves away from the volatile U.S. dollar. To be sure, the euro has also seen its share of peaks and valleys throughout the crisis but the currency is still the most practical alternative to the greenback, says Lombardi, whose research has focused on the ongoing European crisis.

This surely isn't the last time we'll hear the Chinese back the eurozone. If and likely when financial instability rumbles in other parts of Europe in the coming months, we'll probably hear from the Chinese again.

The European Union approved the disbursement of it's last $17 billion tranche of bailout funding Saturday, putting Greece's debt crisis at bay -- for now.

With the last part of the $156 billion bailout package in place, the struggling nation will be able to keep functioning for a little while longer. The disbursement, which will be made by July 15, follows the Greek Parliament's approval of new austerity measures.

This latest piece is the fifth tranche of a bailout that was approved by members of the European Union last year.

"The Greek authorities provided a strong commitment to adhere to the agreed fiscal adjustment path, and to the growth-enhancing structural reform agenda, which are essential components of our strategy to restore fiscal sustainability and safeguard financial stability," ministers said in a statement Saturday.

European officials will now work on a second proposed bailout.

The bailout is a highly contentious subject in Greece. As the Greek Parliament voted in favor of the funding on June 28, thousands of protesters descended on Athens and clashed with riot police. Tear gas choked the streets as protesters and police pounded each other with clubs and firebombs.

Greece: Back from the brink - for now

However, the bailout won't take care of the nation's long-term budget problems, according to Mark Blyth, an economics professor at Brown University in Providence, R.I.

"This is simply giving them more breathing space, while they're kicking the can down the road," Blyth said, referring to the bailout. "They need to have enough money to cover the primary fiscal debt, and for keeping the lights on at the hospitals and military bases. Once they've got that, they're able to default without shutting down the country."

Blyth believes that a Greek default is inevitable. "Ultimately, there's no way the Greeks can pay back what they've borrowed," he said.

The debt-ridden nation has "heavy near-term financing requirements," according to S&P, with about $135 billion in government debt maturing between now and the end of 2013. An additional $82 billion is set to mature in 2014.

Still, the rest of Europe does not want Greece to default, because it would rupture the bond market and undermine the European banking system so severely that the repercussions could be felt on Wall Street.

Greek austerity: Cure or poison?

The French banking association and the German Finance Ministry, as well as German banks, have offered proposals to keep the Greeks from defaulting on $152 billion worth in bonds.
These proposals offer different variations on the same theme: rolling over Greek debt. As explained by Barclays (BCS), one of the options is to roll the debt into a 30-year bond, with at least 70% backed by private sector investors.

For the Greeks, there is one part of their future that is crystal clear: more austerity. In order to qualify for the final tranche of the bailout, the Greek Parliament had to agree to a new raft of austerity measures, in addition to the ones that were imposed on the Greek people last year. This is why people were rioting in the streets of Athens.

Since 2010, the Greeks have faced a myriad of austerity measures including pension cuts, a boost to the sales tax, excise taxes on fuel, cigarettes, alcohol and luxury goods, more stringent eligibility for disability benefits, and a hike in the retirement age to 65 from as low as 61.
On June 29 and 30, the Greek Parliament approved a new raft of austerity measures that included reducing the pay of public workers, increasing the attrition of public jobs and ramping up taxpayer compliance.

Tax dodging, in particular, is one of the most chronic fiscal problems in Greece. Many of the protesters in Athens blame rich tax evaders for their nation's troubles. The protesters -- particularly the young and unemployed -- believe they're being forced to shoulder an unfair burden to get their country out of hock.

The pain of Greece's crisis

Marko Mrsnik, the lead analyst in the recent Standard & Poor's downgrade of Greece, blames the austerity measures for exacerbating the shoddy job market. The unemployment rate has soared to 16.2%, compared to 11.6% in March 2010, he said.

The contradiction of the austerity measures is that they're harming the economy even as they're keeping it afloat, according to Jurgen Odenius, a strategist for Prudential Fixed Income.

Greece has pulled itself back from the brink, by agreeing to a painful austerity package aimed at reducing the country's giant budget deficits.

On Thursday, the Parliament voted to implement those unpopular reforms. The vote set the stage for the nation to secure the final $17 billion of a $156 billion international relief package.

The latest cash infusion means Greece will be able to stave off an immediate default and pay its bills for the next three months.

But Greece is not out of the woods. The country still needs to put the unpopular reforms into practice, negotiate with creditors and privatize big public institutions.

Passage of the austerity plan "will certainly give some short-term relief to markets," said IHS Global senior economist Diego Iscaro. "But concerns about the long-term feasibility of Greece's fiscal plans still remain in place."

Greece is now expected to begin negotiations with the European Union and International Monetary Fund for another bailout, said Wolfango Piccoli, a director at the Eurasia Group in London.

The next round of emergency aid is expected to range between $172 billion and $216 billion, which would cover Greece's expenses through 2014, he said.

As with the previous deal, the new package will come with conditions. The terms are expected to include some concessions by Greece's creditors and the transfer of state assets to the private sector.

But providing more short-term support for Greece "is just kicking the can down the road," Piccoli said.

Officials in Europe are hoping to keep Greece solvent long enough to allow other troubled European nations to strengthen and put pressure on Greece to enact the painful reforms passed Wednesday.

At the same time, the European Union is working with Greece's main creditors -- French and German banks -- to roll over some of the nation's debt into longer-term bonds.

"It's unclear how that will be done, though there seems to be some willingness there," on the part of the banks, said Piccoli. "But that's just another measure to gain time, it doesn't diminish the amount of debt that Greece will be left with."

The bottom line is that Greece's ability to repay its debts remains in question.

"For all economic intents and purposes, Greece has already defaulted," said Sandeep Dahiya, professor of finance at Georgetown's McDonough School of Business. "There's no way Greece can repay all the money it owes."

The big worry is that other debt-laden nations in Europe -- particularly Ireland, Portugal, Italy and Spain -- would be dragged down if Greece were to default in a disorderly way.

But the threat to the U.S. economy, for now, remains remote.

That's mainly because U.S. banks have relatively little Greek debt on their books and the financial markets have largely priced in Greece's fiscal problems, which have been playing out for over a year.

Nevertheless, the situation remains highly uncertain.

Greece austerity: Cure or poison?

"We're still not sure how much exposure there is," said Gus Faucher, an economist at Moody's Analytics. "There is certainly the potential for a big problem in the U.S. if Greece were to default unilaterally."

While he believes that's unlikely, Faucher said an outright default by Greece could cause a financial shock similar to the one that occurred after Lehman Brothers collapsed in 2008.

The investment bank's implosion roiled global financial markets and caused a severe credit crisis.

Analysts say U.S. money market funds, which hold an estimated 40% of their assets in various forms of European debt, would be the most vulnerable in such a scenario.

The pain of Greece's crisis

Ben Bernanke, chairman of the U.S. Federal Reserve, said last week that the central bank is looking into how exposed U.S. money market funds are to Greece. He acknowledged that the indirect exposure could be "very substantial," but sounded hopeful that the worst won't come to pass.

In addition, some U.S. investment banks and insurance companies could be on the hook if they own credit default swaps linked to European debt.

These complex derivatives, which crippled US insurance giant AIG after Lehman fell, could also yield big profits for investors betting against Europe.

However, the market for credit default swaps is opaque and analysts say it's impossible to pinpoint how exposed U.S. institutions may be to them.

Stocks ended the first half of the year solidly higher Thursday, as investors put a turbulent six months behind them.

All three major indexes rallied for the fourth day in a row, helped by a strong economic report on business activity in the Midwest and the latest positive developments out of Greece.

The Dow Jones industrial average (INDU) added 153 points, or 1.3%, led by Intel (INTC, Fortune 500), Caterpillar (CAT, Fortune 500) and Hewlett-Packard (HPQ, Fortune 500). Shares of all three companies rose about 3%.

The S&P 500 (SPX) rose 13 points, or 1%, and the Nasdaq composite (COMP) gained 33 points, or 1.2%. First Solar (FSLR) and eBay (EBAY, Fortune 500) were among the best performing stocks on both indexes.

All three major indexes reached the mid-year mark on a high note. The Dow is up more than 7% while the S&P and Nasdaq are up 5%.

Meanwhile, Wall Street's most widely cited measure of volatility and fear, the VIX (VIX), has dropped nearly 7% during the first six months of the year.

Interactive: A stormy year for stocks

The second quarter has been difficult, however. Stocks struggled over the past two months amid jitters about Europe's sovereign debt problems and an economic slowdown in the United States.

The Dow ended the quarter up 0.8%, while the S&P 500 and Nasdaq finished about 0.3% lower. That quarterly performance was the worst in a year for all three indexes.

Economy: The Chicago purchasing managers index, which measures business activity in the Midwest, jumped to 61.1 in June from 56.6 the prior month. Economists were expecting the measure to slip to 54.

"Based on the series of poor economic reports we've had the last several weeks, expectations were low, so this was a nice surprise," said Joseph Saluzzi, co-head of equity trading at Themis Trading.

Don't fear the commodities bear

Strong regional data is especially welcome news ahead of the national Institute for Supply Management manufacturing index due Friday, but it's only one data point, Saluzzi cautioned.

Adding to the welcome news, Greece voted in favor of implementing the austerity measures approved on Wednesday. The measures aim to keep the debt-ridden country from defaulting.

But as anti-government protests grow worse, some investors worry that Greece's problems are far from over.

There's still a lot to sort out with Greece and we're not out of the woods yet," Saluzzi said. "There are a lot of major global economic concerns, and I think markets will be choppy for the rest of the summer."

The Labor Department reported that weekly jobless claims edged down slightly in the latest week, but fell short of economists' expectations for a bigger drop.

Currencies and commodities: The dollar fell against the euro, the British pound and the Japanese yen.

Oil for August delivery rose 65 cents to settle at $95.42 a barrel.

Gold futures for August delivery slipped $7.60 to settle at $1,502.80 an ounce.

10-year yield at one-month high

Bonds: The price on the benchmark 10-year U.S. Treasury edged down, pushing the yield up to 3.16% from 3.11% late Wednesday.

Companies: Shares of eBay (EBAY, Fortune 500), which owns PayPal, jumped more than 4% a day after the Federal Reserve imposed caps on debit card swipe fees that weren't as high as expected.

Shares of the First Solar (FSLR) gained more than 2%, after the company won $4.5 billion in loan guarantees from the Department of Energy.

World markets: European stocks ended higher. Britain's FTSE 100 gained 1.5%, the DAX in Germany added 1.1% and France's CAC 40 rose 1.5%.

Asian markets also ended the session higher. The Shanghai Composite jumped 1.2%, the Hang Seng in Hong Kong gained 1.5% and Japan's Nikkei rose 0.2%

Here's what Americans can look forward to if lawmakers fail to raise the debt ceiling in time: Treasury would not be able to pay between 40% and 45% of the 80 million payments it needs to make every month.

That's the estimate from a new analysis by the Bipartisan Policy Center, a think tank in Washington founded by four former Democratic and Republican Senate majority leaders.

A delay in raising the debt ceiling could affect Social Security checks, food stamps, federal worker and military paychecks, government contractor bills and payments to Medicare and Medicaid providers.

"Handling all payments for important and popular programs (e.g., Social Security, Medicare, Medicaid, defense, active duty pay) will quickly become impossible," the report's authors noted.
Treasury Secretary Tim Geithner has said that by Aug. 2 he will no longer have enough money on hand every day to pay all the government's bills in full and on time. The government reached the legal borrowing limit on May 16 and has been taking "extraordinary measures" since to keep the country out of default.

To ensure it has enough cash on hand to make a $29 billion interest payment to investors on Aug. 15 -- among other payments -- the government would have to defer 44% of federal spending, and that would affect the broader economy, according to the BPC study.

Treasury is expected to update its estimate of the so-called "drop dead date" at the start of July, but no one expects the date to change much.

It's impossible for anyone to know exactly how much the government will take in and have to pay out on any given day in August. The BPC based its estimates on the revenue and outlays reported by Treasury from August 2009 and August 2010.

Bond experts to Congress: Don't mess it up

It's also impossible to say yet just how the government would prioritize payments. It's fair to assume, however, that picking who gets paid and who gets put off will be a mess technically and socially because it's never been done before.

"The reality would be chaotic," the report states.

The going assumption is that Geithner will do everything he canto pay bond investors, so the country doesn't go into a formal default.

"The Treasury Secretary will squirrel away money like -- well, a squirrel. He may have to delay some payments starting days or weeks early to prepare for big important payments later," said Joe Minarik, who served as the chief economist of the White House Budget Office in the Clinton administration.

And as the BPC study noted, the whole event could cause a public uproar and market unrest, the outcomes of which is anyone's gues.

The government's decision last week to raise prices of diesel, kerosene and cooking gas has brightened prospects of Indian equities . The move has sparked hopes among investors, fretting over the impact of paralysis in policy-making on India's economic growth, that the government may be serious about pushing ahead the next wave of economic reforms, said broking firms.

"The government's decision to hike retail fuel prices in spite of the decline in crude oil prices suggest the government is shaking off its decision-making inertia," said Parul J Saini, strategist, Royal Bank of Scotland. "This should be a positive catalyst for the Indian equity markets," said Saini, in a report.

The Sensex has gained over 5% in the past four trading days. The government announced decision to increase petroleum product prices on Friday evening.

"The move is also a powerful signal to markets that the government is still able to make difficult decisions, in the light of a stalled reform process," said Tushar Poddar and Vishal Vaibhaw of Goldman Sachs. "This move, along with global oil prices coming off and monsoons on track, are positive signs for the economy and for the equity market," they said, in a report.

Analysts perceive India's discussion paper last week, questioning the need for equity caps for foreign direct investment (FDI), as the government's intent to streamline the country's FDI policy.

Investors are hoping that the fuel price increases will result in inflation peaking out over the next few months and signal the end of policy rate tightening by the Reserve Bank of India. Analysts estimate wholesale price inflation will surge 70-100 basis points from 9.06% in May because of higher fuel and cooking has prices.

"From a medium-term perspective, we see the hike in fuel prices as a positive step to incentivise Indian households and companies to ration energy demand, but the near-term inflationary impact," said Sonal Varma and Aman Mohunta of Nomura India, in a report. Economists warn, however, the India's fiscal deficit could widen as the cut in excise and customs duties on diesel and cooking gas will more than offset the benefit of price increases to the government's finances.

"Lower revenue collection owing to slower GDP growth, smaller-than-budgeted disinvestment proceeds, and higher expenditure could potentially push the deficit to 5.8% of GDP, hurting market sentiment, unless the government seeks other ways to raise revenues," said Standard Chartered economists led by Anubhuti Sahay, in a report. India is targeting a fiscal deficit of 5.1% of GDP for 2011-12. Brokers said higher-than-estimated fiscal deficit, especially when the economy is slowing, may not go down well with foreign investors.

In an interview with ET Now, Manishi Raychaudhuri, MD & HoR, BNP Paribas Securities, shares his views on their latest strategy report and talks about the market. Excerpts:

If I look at your latest strategy report and if I look at the fine print there, you have slashed your Sensex target for the year, you expect Indian markets to underperform and according to your report, there are high inflationary concerns which currently could hit Indian economy going forward. So, rather a bearish report?

You did not ask me a question, but I would still summarise what we have tried to say. In the near term, the Indian market is likely to underperform and by near term, I really mean about maybe 3-4 months, possibly till the October-December quarter. And yes, we have cut the Sensex target because there were a couple of variables on which we went wrong. We were clearly anticipating peaking out of inflation by some time in March-April, which did not happen. Inflation turned out to be a lot more stickier than we had anticipated and as a consequence, even the end to the RBI's tightening cycle, which we were expecting some time in the first quarter of this year, it now seems to be prolonged to sometime in the July-September quarter, maybe till around September.

So to that extent, we actually expect the RBI to tighten about twice more, maybe 25 basis points each. And to have the desired effect on inflationary expectations, it should perhaps be done in rapid fire succession in July and then again in September, which could obviously lead to some degree of underperformance. On top of that, we must not also forget that earnings estimates have been declining.

Our own EPS estimates for Sensex have declined about 4% since the beginning of the year, and we think that there could be another 3-4% downside to the Sensex EPS estimate for fiscal 2012-2013. Combined that with the valuations of India, which compared to India's own history or somewhere in the middle of the road, somewhere close to just lower than the average, but compared to Asia ex Japan and compared to China, they are at about 25-30% premium, which means that valuation premium has to compress.

This is our hypothesis behind arguing that in the near term there could be some underperformance by India. Having said that, I must also argue that by the time, we are in the last quarter of this year, some of these macroeconomic headwinds would be behind us. If the market does come down to a valuation level of close to maybe 12.5-13 times one year forward, that would be the right time to load into the high beta stocks among private banks, infrastructure and autos.

But what's your call, the prognosis is generally once inflation peaks out, the market bottoms out and since that process is now elongated with the recent fuel price hike, inflation is not going to becoming down in any hurry. So what's your call on banks and the entire rate sensitive basket? Would you be a buyer?

First of all, yes, inflation has been elongated. The longevity of high inflation is possibly till about September-October. Till then WPI inflation would remain in the present range that we are seeing that maybe in the range of 8.5-9.5%. Secondly manufactured product inflation, which has been increasing now over last 2-3 months, will be possibly on an upswing till about September-October. After that, the effect of recent decline in commodity prices would begin to catch in and possibly manufactured product inflation would be peaking out by sometime in October.

Now as a consequence, we are kind of neutralist, we are kind of fence-sitters on the rate sensitive pack. Now here again it is essentially stock-specific weight which add up to the sector weight. So we are neutral on both banks and automobiles. In banks, we prefer the private sector banks. In fact, we have closely about 25% weight on the banking sector as a whole and out of that, about 80% of that is in the private sector banks with much smaller weight on the public sector banks. Because we think the private sector banks have relatively lower concern about asset quality and among them the high CASA banks, which have a very strong liability franchise or possibly those, which would be able to weather the storm of net interest margin compression a lot better than the sector average. We are also neutral on the auto space where we have actually cut down weight significantly. We only have the consumer autos in the portfolio, the companies that are engaged in two wheelers and the passenger cars not so much in the commercial vehicle space.

Given the way how commodity prices have corrected in last 10-15 days, is that not a positive but more like a short-term negative for Indian markets because that will also hit earnings and profitability for commodity companies?

Yeah. Paradoxically it is a positive for Indian economy, but perhaps in the short-term a negative for the Indian markets because that's the peculiar structure of the Indian equity market. While the economy tends to benefit from commodity price decline, both metals and oil because we are large importers and as a consequence, both fiscal deficit and current account deficit tends to decline. But if you look at the equity market, close to about 30-35% of earnings stream is somehow related to the global commodity prices, be it in metals, oil or petrochemicals. So paradoxically the commodity market declining tends to lead to some underperformance of Indian equities. This is something that we had seen in 2008 as well. The oil and metal prices came down so sharply by late 2008 and early 2009 that the Indian equity market faltered and it fell by almost 60% from the peak, but actually the economy was not doing all that badly at that time.

What's your call on ONGC post the latest news from Cairn and Vedanta and how it may be beneficiary to companies like ONGC?

We think that there are signs of the Cairn-Vedanta deal getting finalised now. We think it is positive for ONGC. So for ONGC, essentially two positives have kind of got coupled in a matter of a couple of days both the government's decision to increase the oil and other oil product prices. And the possibility of the Cairn-Vedanta deal getting finalized. So we are actually positive on ONGC after these two developments.

Give two high conviction investment ideas?

I would suggest that under the current circumstances, No. 1, one should stick to the consumption theme because pretty much everything, be it income stability or the government's programmes, seems to be supporting consumption a lot more than supporting investments. As a consequence, I would recommend Bajaj Auto under the current scenario. The stock has underperformed because of the concerns relating to the longevity of the DEPB scheme, but we think the fundamentals of that company are much stronger. So Bajaj Auto would obviously be one of the choices at this point.

I would also in a similar vein recommend Bharti, Bharti Tele-Ventures, because revenues in the telecom space are becoming a lot more visible and stable. On top of that, the domestic pricing war scenario, which we had encountered a few months back, seems to have almost come to an end and as a consequence, the revenue growth and earnings growth of the companies are getting more linked to subscription, the number of new subscribers and so on. So the telecom space and the two wheeler space look good under the current circumstances.

Why Bharti now? The stock has already appreciated by 52% in last one year.

First of all I must say that we have had Bharti in the portfolio not now but for quite some time, almost for more than a year. We have captured a significant part of the upside. Having said that even after this upside, Bharti remains one of the best cash generators in this business. Bharti remains a stock where the earnings stream and revenue stream are possibly visible. Under the present circumstances where you have a degree of uncertainty about capex and the investments, it is possibly better to look at the consumption-orientated stocks. So in the present uncertain phase of the market as long as this continues, stocks of this type, of the kind that Bharti represents, would possibly continue to be outperformers.

QE2 is just about done. But the Federal Reserve will still be buying massive amounts of long-term Treasuries.

In fact, the Fed's purchases over the next year will likely be at least $300 billion. That's half the size of QE2 -- even if QE3 never takes place.

While the Fed's efforts to pump about $600 billion of new cash into the economy over the last eight months comes to an end this week, the program, known as quantitative easing or QE2 for short, was not the only way the central bank was an active buyer of Treasuries.

Since last August, the Fed purchased $250 billion in long-term Treasuries in addition to the QE2 purchases. That's because it was reinvesting the principal from other securities that matured.

Assuming the Fed keeps reinvesting, as it said it would earlier this month, it will continue to be a very big buyer of bonds in the months to come.

"We still see the Fed being a major buyer of Treasuries, and giving the market some support," said Kim Rupert, managing director of fixed income for Action Economics.

But those purchases may not push yields, which move in the opposite direction of their price, lower for that much longer.

Rupert said she expects bond yields to rise even with the Fed's continued purchases. She said some investors who bought Treasuries recently in a flight to quality will unwind those positions. If the economic outlook improves later in the year, that could also lift interest rates.

The additional Fed purchases will have an impact though. Rupert said it should "slow the updraft in yields in a measurable way."

The Fed still has more than $1 trillion in mortgage-backed securities, debt issued by government-sponsored firms Fannie Mae and Freddie Mac and other long-term bonds on its balance sheet.

While not all of this debt is set to mature in the next few months, the Fed still has a lot at its disposal to roll over into new bond purchases.

Of course the Fed could decide to stop reinvesting the principal of maturing securities. But that could almost have the same effect of actually raising interest rates. It would take significant amounts of cash out of the economy.

Even though some Fed policymakers are worried about the impact the bond buying has had on the dollar and inflation, the Fed does not seem ready to remove all its stimulus just yet. After all, the central bank did just issue a gloomier forecast for growth and unemployment through the end of 2012.

"Most of us can agree the economy is not going gangbusters and it's not a self-sustaining recovery yet," said David Coard, director of fixed income sales and trading for The Williams Capital Group. "For the foreseeable future, the Fed will have to maintain an accommodative stance. It's the only game in town."

U.S. Treasury Secretary Tim Geithner said Tuesday that he supports French finance minister Christine Lagarde as head of the International Monetary Fund.

"Minister Lagarde's exceptional talent and broad experience will provide invaluable leadership for this indispensable institution at a critical time for the global economy," Geithner said in a statement.

The global financial organization is expected to vote on a new managing director as early as Tuesday to replace Dominique Strauss-Kahn, who was arrested in New York last month on sexual assault charges.

The vote on whom to appoint to the influential post comes at a crucial time for the IMF, which has been working closely with the European Union and the European Central Bank to provide financial support for Greece and other troubled European economies.

The only other contender is Mexican Central Bank chief Agustin Carstens, who has been supported by Australia, Canada and Mexico.

Geithner commended Carstens "on his strong and very credible candidacy."

Lagarde, who would be the first woman to run the IMF, is also backed by the United Kingdom, Germany and most European powers. Some Asian and African nations have also signaled support for her candidacy.

The fund's 24-member executive board seeks to agree on a new managing director by consensus.

The IMF, which is made up of 187 member countries, has traditionally been led by a Western European official.

For Greece, the real challenge is still ahead

Some developing nations had pushed to break that tradition, arguing that the IMF should consider candidates from rising economic powers in Asia and South America.

In a statement to the IMF's executive board released last week, Lagarde said the fund "belongs to no one but its 187 member states."

"I am not here to represent the interest of any given region of the world, but rather the entire membership," she continued.

The fund was established in 1947 to help rebuild the international monetary system after World War II. In addition to monetary cooperation and exchange rate stability, the IMF works to facilitate international trade and promote economic growth around the world.

The IMF has been led by John Lipsky, a veteran deputy managing director, since May 19.

Strauss-Khan pleaded not guilty earlier this month to seven charges involving a May 14 incident in which a housekeeping employee at New York's Sofitel hotel accused him of sexual assault.

Once considered a top candidate in France's next presidential race, Strauss-Khan officially resigned from the IMF on May 19. He is being held under house arrest in a Manhattan apartment on $6 million in bail money.

Warnings from all three credit ratings agencies didn't do it. Seven weeks of talks among lawmakers didn't do it. Maybe President Obama's talks with Capitol Hill brass will do it.

But as of now, there's still no debt-reduction deal. And many lawmakers are still demanding one in exchange for their vote to increase the debt ceiling.

Here's an idea: Even if they can't come up with a deal by Aug. 2, lawmakers should raise the debt ceiling anyway. Then they should make a pot of coffee and go back to hammering out a debt-reduction plan.

Fiscal responsibility isn't a one-off proposition; it's an ongoing process.

If Congress fails to raise the debt ceiling by Aug. 2 -- the day when the Treasury Department estimates it will no longer be able to pay all the country's bills -- any number of damaging and utterly preventable scenarios could occur.

Deadbeat nation: For starters, the United States would look ridiculous. The debt ceiling needs to be raised because of obligations that Congresses past and present chose to incur.

Not raising the ceiling would signal to the world that Americans are willfully choosing not to pay their bills. The message won't be "We can't pay." It will be "We could pay, but we've decided not to. Sorry."

Market mayhem: To date, investors have been trading on the assumption -- the rock-solid belief, actually -- that there is just no way Congress would fail to raise the debt ceiling in time.

If Congress dashes those expectations, no one can know exactly how the markets will react. But most think markets will react, and not well.

Some bond experts expect that contrary to popular belief, Treasury rates won't rise but stocks may tank. In other words, there will be a move out of risk-based assets and a flight to safety in bonds.

Bond experts to Congress: Don't mess it up

So interest rates may stay low, but Americans' investments get whacked.

Or, Treasury yields could become volatile and start to climb as investors smell political instability in Washington. That would push the cost of U.S. debt higher.

Hopping mad republic: If Treasury is technically and legally able to prioritize the payment of interest to bond investors, the country may avoid the kind of default that would trigger rating downgrades.

A growing number of lawmakers say that it's OK not to raise the debt ceiling as long as Treasury continues to make payments to bondholders.

But that doesn't mean there wouldn't be seriously negative consequences.

"Someone -- perhaps millions of someones -- won't be paid on time. Contractors, federal workers, program beneficiaries, or state and local governments will suddenly find themselves short on their cash flow," former Congressional Budget Office Donald Marron wrote in a recent op-ed in the Christian Science Monitor.

That could hurt the economy, which is still trying to find its sea legs, and won't do much for the country's mood.

Damaged reputation: Even if bond investors continue to be paid, investors and credit rating agencies won't take it lightly when Treasury has to delay payments to others.

Such delayed payments -- and the public anger that would result -- could cause investors to worry that even if they're getting paid today, tomorrow may be another story. And they could trade on that concern, even if it's unfounded. That, in turn, could cause interest rates to rise.

Fitch Ratings Agency said it would put the country on "Ratings Watch Negative" in such a scenario.

"Extensive payment arrears to suppliers of goods and services to the government ... would damage perceptions of U.S. sovereign creditworthiness and signal growing financial distress," the agency said in a recent report.

The S&P already has already downgraded its credit outlook on the United States to "negative" from "stable." And Moody's is considering doing the same.

Downright default: This is the very worst and still least likely of outcomes, because most believe that there's no way the U.S. government would not pay its bondholders.

But if they don't raise the ceiling, lawmakers would raise the chance that those bondholders don't get paid over time.

Debt ceiling: What you need to know

That could theoretically happen if the Treasury a) is somehow not able to prioritize payments to bondholders; or b) has to pay out more to bondholders than it has coming in on any given day.

On some days Treasury brings in more money than it has to pay out. And on some days it doesn't. But on average, the United States comes up short by about $125 billion every month.

To cut that much spending or raise that much extra in tax revenue overnight would hobble the U.S. economy and very likely de-stabilize world markets.

A U.S. default would be catastrophic, influential bond investor Mohamed El-Erian said Sunday on CNN's "Fareed Zakaria GPS."

His advice to Congress? Raise the ceiling, even if you can't complete a debt-reduction deal in time.

"If ... you're going to kick the can down the road, kick the can rather than face something that could be catastrophic in terms of legal contracts being triggered," said El-Erian, CEO of PIMCO

Inflation in emerging markets could reach double digits, while economic growth this year will average 6 per cent, according to Franklin Templeton's veteran emerging markets investor Mark Mobius .

Economic growth and rising commodity and food prices are fuelling inflation in emerging economies, but Mobius said these countries have previously withstood inflation running into the thousands of per cent, such as in Brazil.

"I would be surprised that it goes into high teens, but it could go into the teens. I think most countries are going to try and keep it down," Mobius, who is executive chairman of Franklin Templeton's Emerging Markets Group , told Reuters on the sidelines of the Fund Forum conference in Monaco.

"What you have to focus on is (the) real interest rates environment, because if the inflation rate is above what people get in the banks, they will obviously have the tendency to move into equities," he said.

Mobius, who oversees about $54 billion in assets at U.S. asset manager Franklin Resources (BEN.N), said growth in Asia will be a little faster than in other emerging markets.

"GDP growth will be 5-6 per cent (on) average for emerging markets in general, in Asia I think it will be one (per centage) point more than that," he said.

Private investments in emerging markets will hit around $1 trillion in 2011 -- an estimate revised upward since January -- according to the Institute of International Finance .

Some analysts say inflows to these fast-growing economies, combined with existing inflationary pressure could lead to asset bubbles, posing what some experts called "monstrous" risks.

The Federal Reserve is winding down its $600 billion bond buying stimulus that helped fuel an eight-month stock rally, and experts say stocks are ready to take back the reins.

They don't need or want any more stimulus, say strategists surveyed by CNNMoney.

Even though stocks have retreated about 7% since the start of May, most market strategists say the pullback is temporary, and are calling for the S&P 500 to rise more than 7% during the second half.

That means the S&P 500 would end 2011 with double-digit gains ... at a fresh 3-year high. All of that without any additional stimulus.

"The Fed should stop. They've done more than enough already," said Matt King, chief investment officer at Bell Investment Advisors. "Any further stimulus only increases the long-term risk of inflation, which we already view as high."

A stormy year for stocks

What's more, some went so far to say that the Fed's stimulus program, known as quantitative easing or QE2, was "a failure."

"It weakened the dollar and stuck the economy with higher food and energy prices," said Donald Selkin, chief market strategist at National Securities, adding that those factors are to blame for the recent pullback in consumer spending and slowdown in economic growth.

CNNMoney survey: Where the markets are headed

Rather than another round of monetary stimulus, experts say policymakers need to focus their goals on righting the nation's fiscal ship to keep the market and economy on track.

"The Fed should move to the sidelines until Congress acts to extend the debt ceiling and addresses a budget deficit package," said Marc Pado, chief investment strategist at Cantor Fitzgerald.

Without Fed intervention, Congress may also be more inclined to address tax policies that are keeping record amounts of corporate cash abroad, experts said.

If Congress were to enact some sort of repatriation tax holiday, it could bring some of that money back to the United States, which would spur business spending and lead to more job creation.

"The Fed needs to pass the baton to the next runner in this relay race and that is business spending," said Burt White, chief investment officer at LPL Financial. "It is time for businesses to spend and hire, which will move the baton later to the anchor runner, the consumer."

Chinese authorities released prominent human rights activist Hu Jia Sunday, days after freeing renowned dissident artist Ai Weiwei.

"A sleepless night -- Hu Jia arrived at home at 2:30. He's safe and I'm very happy," Zeng Jinyan, Hu's wife, said in a Twitter post Sunday morning. "He needs to rest for a while."

Hu, 37, denounced China's human rights record in a series of articles ahead of the 2008 Beijing Olympics and was later sentenced to 3.5 years in prison for "inciting to subvert state power." Ai, the conceptual artist turned government critic, was released Wednesday on bail after authorities detained him for nearly three months for tax evasion, the state-run Xinhua news agency reported.

The seemingly positive news, however, has been dampened by the noticeable silence of both once-outspoken activists.

While Ai declined to answer questions from reporters outside his home early this week, police Sunday guarded entrances to Hu's apartment compound and patrolled surrounding streets. Zeng, his wife, appeared unreachable via phone or the internet.

Zeng told CNN Friday that authorities started 24-hour surveillance on her several days before Hu's expected return. In an interview last December, she predicted a virtual prisoner's life for the couple in their housing complex, called Freedom City.

"Hu Jia told me that he won't change, and police told him they may put him under house arrest in that case," she said. "I'm prepared for it."

"As long as there's no democracy or the rule of law in China, our situation won't change at all."

Last year's Nobel peace laureate Liu Xiaobo, also a rights activist, was convicted of the same crime as Hu. Liu is still serving an 11-year jail term.

Activists say the Chinese government, worried about potential uprisings inspired by the Arab Spring, has been increasingly tightening its grip on freedom of expression, targeting not only political dissidents but also intellectuals and artists.

Guo Jian said he has noticed such chilling effects from his studio at the Songzhuang art village, not far from Hu's home.

The veteran artist has been working on a startling installation piece that shows the very symbol of state power being bombed and razed. In the still-untitled diorama, model warplanes hang by thin threads fly over a miniature Tiananmen Square. The heart of Beijing is dotted with bulldozers and tanks, with the iconic Tiananmen Gate and Chairman Mao's mausoleum smashed and half-destroyed.

"The police have sent someone to say, don't show your work or don't let other people know about it," he said. "They're really worried about what I'm doing."

Guo, 48, says for the first time in his 20-year career, police now visit him regularly and plainclothes agents sometimes shadow him on the streets.

Pointing to his unfinished diorama, Guo says the authorities' outdated mentality and methods -- silencing perceived dissent through intimidation and detention -- only reinforce the message in his work: the potentially explosive consequences of suppressing people's voices for too long.

While he feels heartened by the release of fellow-artist Ai and activist Hu, Guo remains concerned about the current crackdown and doesn't see it ending anytime soon.

"Even though we got someone back, the fear is there," he said.

Share investors are likely to cheer the increase in fuel prices that is expected to improve India's deteriorating finances, partly weighed down by fuel subsidies and demonstrate the government's commitment towards reforms. But this optimism is unlikely to translate into gains for stocks as the much-awaited decision on diesel and cooking gas prices will add to inflationary pressures in the short-term and may prompt the central bank to increase rates further.

"It is a bold move by the government after a long time and investors will like it," said Motilal Oswal, chairman & managing director, Motilal Oswal Financial Services . "While the move is inflationary in short term, the market has more or less discounted it, but a lot will depend on the monetary policy reaction," he said.

On June 16, the Reserve Bank of India raised key rates for the tenth time since March 2010 and is widely expected to tighten the screws further in July.

Focus to be on Europe, Crude Oil

Investors fear more rate increases would be excessive and would delay the economy's ability to bounce back once inflation settles around the central bank's comfort level of 6%. India's wholesale price inflation jumped to 9.06% in May. Fund managers expect inflation to accelerate to over 10% over the next few weeks as higher fuel prices would increase transportation costs of food.

In the longer run, most economists say, the higher price of diesel will encourage more rational use of the fuel and benefit the wider economy. "The increase in diesel and LPG prices may have an effect on inflation in the short term and in turn worry the market, but the move is beneficial for the economy and long-term investors will be happy," said Aneesh Srivastava, chief investment officer, IDBI Federal Life Insurance.

Brokers said the focus this week will continue to remain on the debt situation in Europe and the direction of crude oil prices. Benchmark Indian share indices - Sensex and Nifty - rose almost 3% on Friday, as foreign investors bought shares worth Rs 890 crore after global crude oil slid, Europe pledged to rescue Greece, and China hinted that it may be nearing the end of monetary tightening.

In the past few months, the perception of a government in disarray has gained ground as it has increasingly given the impression of being unable to deal with a blizzard of scams and agitations by groups claiming to represent civil society.

A widely-followed CEO poll carried out by industry body Ficci and published by ET in its edition dated June 13 reported that a majority of respondents expected little of the Congress-led UPA government. The price hikes may help reshape the impression of haplessness. Late on Friday, the government raised diesel rates by Rs 3, LPG by Rs 50 per cylinder and kerosene by Rs 2 per litre.

In May, the government had increased petrol prices by Rs 5 per litre. The government last increased prices of diesel and cooking gas on June 26 last year, despite global crude strengthening since then. "If all petro product prices are passed on properly, markets will bottom in the next three months and recover significantly thereafter because growth is still there," said Sankaran Naren, chief investment officer, ICICI Prudential Asset Management.

OMCS TO BENEFIT

Shares of oil marketing companies may surge on Monday as the government's decision to increase petroleum product prices will help trim losses that they incur from subsidised sale of oil and cooking gas. Brokers said the step has brought cheer to investors in these companies as they expected a lesser increase in diesel prices and none in kerosene and cooking gas.

Though the three oil marketing companies - Indian Oil Corp (IOC), Bharat Petroleum Corp (BPCL) and Hindustan Petroleum Corp (HPCL) - together will still incur revenue losses from fuel subsidies of Rs 121,000 crore this year, the increase in product prices will reduce their monthly borrowings and improve cash flows.

"Shares of oil marketing companies will rise this week not because the petro price increases will bring these companies back into profits, but that there were very little expectations from the government," said the investment head of a mutual fund owned by a public sector bank. "Also, their valuations are almost at rock bottom because these stocks have hardly seen any movement," he said.

Shares of BPCL and IOC have fallen about 4% so far in 2011 against the 10% fall in the Sensex during the period. HPCL shares, which surged 6% on Friday, have been unchanged since January. BPCL and IOC gained almost 3% each on Friday ahead of the meeting of the government representatives to decide on the prices. Oil marketing companies buy crude at international prices, but sell diesel, kerosene and LPG at subsidised prices fixed by the government.

The government compensates them through a mix of cash subsidies and discounts from oil exploration and production companies, including Oil & Natural Gas Corporation (ONGC) and Oil India. Shares of ONGC and Oil India could also rise on Monday as their share of the overall subsidies will drop after the price increases. "Outlook of upstream companies have been clouded by the ad hoc nature of the subsidy-sharing formula. Lack of concrete subsidy-sharing mechanism has resulted in earnings/valuations of upstream companies being contingent upon government directives," said Enam Securities, in a note prior to the rise in prices.