China demand, Fed concerns prompt move to cash

The slight possibility of the Federal Reserve going slow on its ultra-loose monetary policy took the wind out of Indian stocks, which rely heavily on foreign institutional investment for support. Although the US central bank is unlikely to curtail its bond buying programme anytime soon, any move to tighten liquidity — whenever it happens — could staunch global flows.

Together with worries about China’s slowing economy, investors across Asia dumped stocks and sought safety in cash. While the widely-tracked Indian stocks benchmark, the top-30 Sensex, fell 2.9 per cent in the week to Friday, its first weekly drop since rallying 11.2 per cent over the previous five weeks, the MSCI Asia Pacific Index shed 2.7 per cent in its biggest weekly decline since early July last year.

“Any whiff of global tightening is bad news for India,” said equity salesman Prashant Dalal. “It’s a kind of ‘red card’ and reason for much alarm because foreign inflows have been singularly responsible for the market rally since September last year.”

Minutes of a recent Fed meeting showed that a few members favoured unwinding the stimulus package by June if a recovery in the world’s biggest economy sustains. The sell-off in stocks that followed the disclosure also took a toll on the rupee, dragging the Indian currency to its weakest in nearly a year past 56 to the dollar.

Foreign funds have bought Indian shares and debt worth $5.15 billion in May, according to the Securities and Exchange Board of India, although they have been net sellers of $385.5 million of debt on Thursday.

Turbulence in the horizon

The global liquidity concerns could not have come at a more inopportune time for investors in Indian securities. There are some dark clouds gathering in the horizon arising from regulatory edicts, such as a requirement for all listed companies to have a minimum public float of at least 25 per cent. With the deadline for the rule taking effect in June, there will be scamper for share offerings in the coming weeks.

Jyotivardhan Jaipuria and Anand Kumar, research analysts at DSP Merrill Lynch (India), estimate share sales by private-sector companies – including Gillette India, Oracle Financial Services and Jaypee Infratech – at $1.8 billion by June. The share supply could reach $2.5 billion by August when the rule kicks in for state-run companies.

“While we have witnessed a flow of deals from the companies to either lower their promoter shareholdings or de-list from the exchanges, there are still 48 private companies with more than 75 per cent promoter shareholdings. These exclude companies like Wipro, which has already complied with the norm,” the analysts said in a note.

“Similarly, there are 12 PSU [public sector undertaking] companies with more than 90 per cent government ownership.”

Some recent listings like Bharti Infratel and L&T Finance could get more time to comply, while a few others that are in the midst of tying up deals and restructuring may also be given an extension.

Nevertheless, the supply of more stocks in the market could pile pressure on prices. This could be particularly stressful for the market if foreign inflows slow down.

Technical resistance

The Sensex, which closed at 19,704.33, should find the going hard. The broader Nifty index fell 3.3 per cent, its biggest weekly drop since March, to 5,983.55 and there could be more weakness, according to technical analysts.

“Our bias continues to be negative given the selloff we have seen in high beta sectors as well and failure of prices to protect the important support of 6110 – 6114. A move below 6070 can intensify the selling pressure and close below 6020 will indicate that the bigger downtrend has probably started,” Waves Strategy Advisors wrote in a report.

Brokerage India Infoline said the Nifty’s inability to sustain above 6,200 after rallying about 13 per cent from April lows showed fatigue.

“With this week’s decline, Nifty is back near important support of 5,940 levels (38.2 per cent retracement of the previous upmove). It is the same level from which the Nifty broke out in late April and attempted peak above 6,200. So in the near term, 5,940-5,950 range should act as a strong support,” it said.

Points to ponder

While big investors will be watching global factors for direction, some domestic issues will also be on the radar. The government is set to release March quarter GDP on Friday and the data is likely to reaffirm the slowest growth rate in a decade, although it should be better than the 4.5 per cent expansion in the three months ended December.

With slowing inflation this should provide a strong case for another rate reduction in June when the Reserve Bank of India reviews policy. Focus will also shift to the annual monsoon, which is vital for the country’s $1.3 trillion economy that relies on rural demand for growth.

“After almost three years of slowing economic growth and elevated inflation, we are now seeing early signs of a reversal in the stagflation-type environment as policy makers are beginning to take steps to correct the bad growth mix (high fiscal deficit and low investment),” analysts led by Chetan Ahya by Morgan Stanley wrote in an investment note.

“We expect the initial phase of recovery to be driven by an improvement in growth mix and productivity growth rather than a big rise in investment to GDP or headline GDP growth. As the macro stability environment (inflation, current account deficit and high banking sector loan-deposit ratio) improves, it should set the stage for a stronger recovery in growth.”

It expects GDP growth to improve to 6.3 per cent by the December quarter.

 The writer is a journalist based in India