Business | Economy
India may announce further rate cuts
Expectations for aggressive rate cuts and another economic stimulus package that is in the offing should underpin Indian shares this week, with the government's focus clearly shifting to support flagging growth as inflation heads southwards at a brisk pace.
- By Geetha BhaskaranSpecial to Gulf News
- Published: 22:40 December 20, 2008
Mumbai: Expectations for aggressive rate cuts and another economic stimulus package that is in the offing should underpin Indian shares this week, with the government's focus clearly shifting to support flagging growth as inflation heads southwards at a brisk pace.
"Perception is a huge driver for stock markets," said equity trader Kevin D'Souza. "Much of the bad news has been factored in. People are now looking to long-term buys."
Traders are betting that foreign fund allocations will pick up in the new year after the sell-off in 2008, following the massive injections of liquidity by governments across the world.
This was bolstered by the revival in foreign portfolio investment of about $500 million (Dh1,835 million) so far this month, after outflows of $13.7 billion between January and November. The inflows have helped lift the top-30 Sensex about a third from its year lows in October.
Still, the Sensex, which gained 4.2 per cent last week to 10,099.91, has lost more than half its value this year.
Excise duty
"There will be hiccups and some pain over the near-term," D'Souza said. "But there is money to be made over the long haul -especially in stocks of banks, real estate and construction."
Industrial output in November is expected to be worse than in October, when it fell for the first time in 15 years. An indication of this was available in a sharp drop in excise duty collections last month.
"With the alert on factory output, assertive growth targeting can't be put off. Be it with fuel prices, rate cuts or fiscal packages, the government has so far staggered rather propelled feel-good," the Times of India, the country's largest-selling newspaper, wrote in an editorial.
It said the Reserve Bank of India (RBI) had more leeway to boost credit than the US and Japan which had slashed interest rates to near zero despite having little room for monetary manoeuvre.
"The immediate need is a second round of fuel price cuts, more so since the earlier reductions were modest," the newspaper said.
Annual inflation in early December fell to 6.8 per cent, the lowest in more than nine months and sharply below eight per cent a week before, reflecting the effect of a cut in government-controlled prices of petrol and diesel.
Inflation
Many economists believe the rate of rise in prices will slow to three per cent by the end of the financial year in March, less than half the central bank's target of seven per cent.
"I have said it (inflation) is going to come down. It may come down even further," Montek Singh Ahluwalia, deputy chairman of India's Planning Commission, told report-ers.
"It is my view that fiscal stimulus will not end in the current fiscal year."
"Since the global slowdown is not just this year but also next year, the fiscal stance that we adopt needs to be considered not just for this year but also next year."
Last week the government sought parliament's approval for spending an extra Rs424.8 billion (Dh33.2 billion) to boost economic growth, which has been slowing due to high borrowing costs and the crisis.
The RBI has cut its main lending rate by 250 basis points to 6.5 per cent since mid-October and reduced banks' cash reserve requirements to ease a liquidity crunch.
Many economists have lowered their forecast to around seven per cent for 2008-09 and analysts said the RBI would cut rates in the coming weeks.
"I think the RBI will go for aggressive moves," D.K. Joshi, principal economist at rating agency CRISIL, told a news agency.
"We are pencilling in a 250 basis points cut in banks' cash reserve requirements to 3 per cent, a 150 basis points cut in the repo rate to 5 per cent and a 100 basis points cut in the reverse repo rate to 4 per cent, all by mid-2009," said Sonal Varma, an economist at Nomura Research.
D'Souza said shares in government-run companies were attractive buys because they held huge cash reserves and were potential candidates for big dividend payouts or bonus offerings before the financial year ends.
- The writer is a journalist based in India
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