Factory output strengthens India stocks

Mumbai: The momentum is towards consolidation in Indian shares, which have more than doubled in just six months, with the focus expected to shift to quarterly earnings and a clearer picture on the impact of drought in nearly half the country's districts.

Money managers will be watching advance tax payments by companies, due by Tuesday. The figures will be an indication of how companies are faring this year and should set the trend for the stock market.

Factory data on Friday showed output rose for a seventh month in a row, climbing 6.8 per cent in July from a year earlier. The government also revised upwards industrial production to 8.1 per cent from 7.8 per cent announced earlier, signalling activity was picking up in the third biggest economy in Asia.

"At this point, it appears that the government's stimulus measures are offsetting the drought impact," Citigroup economist Rohini Malkani said.

The strong numbers in June and July coupled with the base effect kicking in from October could result in industrial growth surprising on the upside, she said.

Manufacturing activity is starting to pick up across Asia as government stimulus worth about $1 trillion(Dh3.67 trillion) boosts demand and the global recession eases. China's industrial output rose 12.3 per cent in August, while Malaysia's factory production dropped the least in eight months in July.

A late revival in monsoon rains should provide succour in India, with reservoirs replenished and helping planting for the winter. The rainfall shortfall is now 20 per cent since the season began in June, down from 29 per cent in mid-August.

"This, coupled with the improvement in water levels in reservoirs, 51 per cent of full storage capacity versus 66 per cent last year, is encouraging and bodes well for the winter crop," Malkani said.

Still, the drought in many parts and damage to crops will keep upward pressure on food prices that jumped nearly 15 per cent in late August.

However, policymakers have hinted the authorities are in no hurry to raise interest rates in the near term. Lower borrowing costs have been a key driver for consumer spending, boosting demand for cars, refrigerators and washing machines.

"The number one worry at this point, I would say, is not yet inflation. Number one worry is to read clear signals of getting back to reasonably comfortable growth level. Inflation is the number two," Finance Secretary Ashok Chawla said last week.

He saw no reversal in the central bank's expansionary monetary policy in the foreseeable future. "The exit policy will have to wait for little later," he said.

The Reserve Bank of India was more reserved, but signaled it would not rock the boat.

"We need to take measured and timely action, and make a balanced judgement; not to be too benign but also not go over board with excessive or premature tightening," Governor D. Subbarao said.

The central bank cut its main lending rate by 425 basis points between October and April and added massive liquidity to markets as the global downturn hit the Indian economy harder than expected.

Macquarie Group said it expected India's economic growth to slow to 6.5 per cent in 2009-10 from its earlier forecast of seven per cent, as weak rainfall affects the agriculture sector.

"This downgrade is more a hiccup than the beginning of a GDP downgrade cycle as we expect quarterly GDP growth from calendar 2010 to reach eight per cent," Rajeev Malik, an economist at Macquarie in Singapore, said in the note.

"The downward revisions are related only to the agriculture sector asnon- agricultural forecasts have, in fact, been raised." It said Indian stocks were a "little expensive" over the next quarter and expected near-term gains to be limited, but maintained its target for the top-30 Sensex at 18,000 by March. It raised its rating on automobile stocks to "overweight" from "underweight".

It added Reliance Communications and Maruti Suzuki to its top picks, which already included Axis Bank, Tata Steel and GAIL India. The Sensex gained 3.7 per cent last week to 16,264.30 - more than doubling from its March low of 8,047.17.

- The writer is a journalist based in India