Foreign selloffs bear down on Sensex

Mumbai: With the US facing its worst financial crisis since the Great Depression of the 1930s, the repercussions will be felt in Indian markets as foreign investors pull out more funds because of diminishing appetite for risk and to make up for losses elsewhere.

For the past few weeks, the withdrawals have been the trendsetter for stocks and this is unlikely to change in the near term. Even if a stalled $700 billion bailout plan passes muster in the US Congress, it would at best douse the panic sweeping world markets but the outlook would remain bearish.

"We've yet to see the light at the end of the tunnel," said broker Kevin D'Souza. "There will be more blood-letting, more pain before a turn-around."

He said investor confidence had been shattered by the collapse of large US banks, while a cash crunch faced by other foreign financial institutions was putting pressure on Indian stock markets as they unwound their holdings.

Data for September 1-25 from the Securities and Exchange Board of India showed foreign portfolio investors had pulled out almost $2 billion, a record outflow since they began investing in India in 1993.

"If the US rescue package comes through we might see a pause in the outflow, but there's really no chance for any inflow," D'Souza said.

The withdrawals have slammed the rupee, chipping away the returns for foreign funds already grappling with losses of more than a third in the value of the Sensex this year.

The rupee ended last week at 46.55 per dollar, down 5.6 per cent so far in September and off 15.3 per cent in 2008.

D'Souza said US President George Bush's address last week that America could slip into a financial panic was a big threat to the global economy because it set off a domino effect across the world.

"Ultimately, our country could experience a long and painful recession," Bush had said, drumming up support for the rescue package.

The Sensex shed 6.7 per cent last week, its biggest weekly fall in over six months, to 13,102.18. Technical analyst Kanu Dave said the benchmark could head towards 10,000 if quarterly results in October turn out to be worse than expected.

"The expectations about earnings are already low because of high interest rates, double-digit inflation and falling demand," he said.

Cautious optimism

Top businessmen, including PepsiCo CEO Indra Nooyi, at an Economic Times discussion last week was hopeful India's $1 trillion economy would grow by seven to eight per cent in 2008-09, but there was also caution.

"There seems to be a consensus that in the short to medium term India, and indeed other fast growing emerging economies, will get hit by a US recession," the business newspaper wrote in an editorial on Friday.

"Even if India's GDP growth decelerates by 2-3 percentage points, it is bound to cause pain," it said.

Infosys Technologies, which gets more than half its revenue from the US, will kick off the quarterly earnings parade on October 10.

The outlook for software services companies has been downbeat due to the turmoil in the US, but the rupee's slide should provide some solace.

Tata Motors will be vying to garner investor funds this week when it launches a rights issue on Monday to raise Rs41.5 billion.

Hindalco opened its rights offering for Rs50.5 billion a week earlier. Both the blue-chip companies will have surmount turbulent market conditions to get their sale through.

Annual inflation held above 12 per cent on September 13 at 12.14 per cent, unchanged from a week earlier.

"Headline inflation will remain in double digits until January due to base effect and higher prices of manufactured products," Pronab Sen, the country's top statistician, said.

Tushar Poddar, an econ-omist at Goldman Sachs, said the Reserve Bank of India would likely leave the over-night lending rate unchanged at a seven-year high for the rest of 2008 as it shifted focus to reviving growth from curbing inflation.

"We think the interest-rate cycle has peaked," he wrote. "With commodity prices coming off, demand slowing and expectations that inflation will fall, the case for raising rates has weakened."

- The writer is a journalist based in India.