Business | Markets
Financial turmoil rattles Sensex
India's $1 trillion economy is showing signs of strong resilience after a few hiccups, but this is providing no comfort to the stock market, which is getting knocked down by the global financial turmoil.
- By Geetha Bhaskaran, Special to Gulf News
- Published: 00:02 September 14, 2008
Mumbai: India's $1 trillion economy is showing signs of strong resilience after a few hiccups, but this is providing no comfort to the stock market, which is getting knocked down by the global financial turmoil.
There will be little respite this week as foreign funds, rattled by worries of more Lehman Brothers-like trouble, take to the exit route in hordes.
Indian banks are tightly regulated by the central bank and are not exposed to the global credit problem, but the jittery global sentiment is overriding domestic factors.
"We're at the mercy of world equities," said stock trader Kevin D'Souza. "There is so much uncertainty about the mess in the financial sector; no one knows how much worse it can get."
Foreign portfolio investors dumped shares worth over $610 million in three days last week, taking their total withdrawal so far this year to $8 billion. In comparison, they were net investors of $17.4 billion in 2007.
The outflows pushed the Sensex down 3.3 per cent last week to its lowest close since July, accelerating the fall this year to nearly a third.
Mumbai-based equity strategist V. Venugopal said smart investors should use the market slide to accumulate stocks because there was every chance for prices to rebound sharply when the tide changes.
"The momentum can change direction very quickly," he said. "For India specifically, the fundamentals are shifting gear and it's only a matter of time for the market to follow."
Data on Friday showed industrial production rose to a five-year high of 7.1 per cent in July from a year earlier, above market expectations and picking up from a drop in pace in May and June.
The rise was led by a 21.9 per cent jump in capital goods output, indicating investments and underlying business confidence was strong.
Unlike Europe, Japan or China, India's economy is mainly driven by domestic demand. A growing wealthy middle-class estimated at about 300 million people is a huge market for products from luxury cars to consumer goods, Venugopal said.
Manufacturing output rose 7.5 per cent in July, while consumer goods production rose 7.3 per cent and consumer durables output was up 11.2 per cent. India's infrastructure sector, which accounts for 26.7 per cent of industrial output, grew an annual 4.3 per cent in July, up from 3.4 per cent in June.
The acceleration happened even as oil prices soared to a record high above $147 a barrel in mid-July, while domestic inflation climbed a 16-year high of 12.63 per cent in early August.
Oil prices have since tumbled, falling 30 per cent to just above $101. Inflation has eased for three weeks in a row to 12.01 per cent by end-August.
"Softening prices of crude oil and other commodities hold out hope that the worst of inflation is over," the Economic Times said in an editorial on Saturday.
On the other side, the Reserve Bank of India (RBI) had raised its benchmark short-term lending rate to a seven-year high of nine per cent on July 29 and also tightened money supply.
The higher borrowing costs hurt demand for cars, with sales in August falling 4.4 per cent from a year earlier, following a 1.7 per cent drop in July. But motorcycle sales picked up in August.
Opinion is divided on whether the RBI will again raise rates in October when it is scheduled to review policy. But new central bank governor D. Subbarao last week sounded more like a dove than the hawk his predecessor Y.V. Reddy was.
"We will have to watch the impact of the measures already taken," Subbarao, who was the finance secretary earlier, said at his first news conference after taking charge. "We will be monitoring the situation closely and continuously, be mindful of the implications of our monetary stance on the growth prospects, and take action as appropriate."
His comments indicated the RBI was in no hurry to tighten policy.
Weak rupee
One worrying factor would be the weakening rupee, which fell to its lowest in almost two years last week at 45.80 per dollar. It has lost four per cent this month on heavy withdrawals from the stock market and on oil payments.
The sharp drop in the rupee, down almost 14 per cent this year after rising over 12 per cent in 2007, will put upward pressure on inflation while the benefit to export-driven software firms will be tempered by their currency hedges and relative drop in the euro
- The writer is a journalist based in India.
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