Indian market revival likely to stall

Mumbai: A nascent recovery in Indian shares could stall this week if the central bank fails to loosen policy and restore confidence.

Quarterly earnings by companies last month showed high borrowing costs were crimping consumer demand across industries.

With annual inflation easing to a 4-1/2 month low in mid-October and going lower, expectations have risen the Reserve Bank of India (RBI) will shift its focus to growth and cut interest rates.

Those hopes were boosted by rate reductions by the US, China, Hong Kong, South Korea and Japan.

"There's a growing chorus for lowering rates," said Biju Dominic, who advises retail investors in Mumbai. "But the question is: will the RBI do it."

Boosting confidence

The Sensex pulled back from three-year lows last week on speculation the RBI would take cues from other central banks across the world and follow suit.

After slashing its key short-term lending rate by one percentage point to eight per cent the week before, the conservative RBI has held its ground.

Dominic said the RBI needed to bring down rates to six per cent to revive slowing economic growth and boost confidence among investors.

"The central bank seems to be placing more emphasis than perhaps is necessary on inflation, especially given the significant drop in commodity prices," Rajeev Malek, regional econ-omist at Macquarie Group in Singapore, told a wire service.

"In the current global setting, it should be putting more policy easing in place because the economy is screaming for it."

Government officials and newspapers have joined in the demand to cut borrowing costs.

"This is a time when it is absolutely essential to get low, stable interest rates," the widely circulated Indian Express wrote in an editorial last week.

"If this is not done it will result in lower lending by banks, adversely impacting businesses."

The RBI has cut its 2008-09 economic growth forecast to 7.5 to eight per cent from around eight per cent. It expects inflation to be around seven per cent at the end of the financial year in March 2009. Inflation was at 10.68 per cent in mid-October from a high of 12.91 per cent in early August.

The Sensex posted its first rise in six weeks, gaining 12.5 per cent last week, largely on hopes the RBI will cut rates, but the market's soft underbelly is vulnerable to a shakedown again.

The widely tracked index lost almost 24 per cent in October, its worst monthly performance ever - surpassing the previous record fall of 22.7 per cent in May 1992, following the unravelling of the Harshad Mehta scam.

Equity strategist V. Venugopal said the market's outlook also depended on foreign mutual funds, who were heavy sellers last month.

"Global investors are shying away from risky assets after suffering huge losses," he said. "It's foolhardy to expect net inflows in the near future." Data from the market regulator showed foreign funds dumped shares worth a record $3.8 billion in October, taking the outflow in 2008 to $13.1 billion.

However, provisional figures from the National Stock Exchange indicated they had bought a net $250 million on Friday.

Much of the outflow was due to redemption pressure caused by the global financial crisis and the market slump.

The Sensex has lost 52 per cent this year, after rising more than 45 per cent in the previous four years.

The withdrawals also put pressure on the rupee, which tumbled to a record low of Rs50.29 against the US dollar last week before bouncing on heavy central bank intervention and on speculation a further cut in rates would revive inflows into stocks.

The rupee ended last week at around Rs49.45 per dollar, still down five per cent in October and 20.3 per cent in 2008. Last year, it gained 12.4 per cent.

The RBI has been selling $500 million to $1 billion every day to slow the rupee's slide, the Economic Times said on Saturday.

The intervention has steadily cut into foreign exchange reserves. Data showed the reserves fell by a record $15.5 billion in the week ending October 24 to $258.4 billion.

The stockpile has shrunk by more than $50 billion since the start of the financial year on April 1.

The writer is a journalist based in India.