Business | Markets
Little respite for wobbly Sensex
There will be little respite for the wobbly Sensex this week, with accelerating inflation posing a big threat to growth, and a government under severe pressure to rein in prices may tighten monetary policy.
- By Geetha Bhaskaran, Special to Gulf News
- Published: 00:31 April 6, 2008
Mumbai: There will be little respite for the wobbly Sensex this week, with accelerating inflation posing a big threat to growth, and a government under severe pressure to rein in prices may tighten monetary policy.
Most investors have been waiting for quarterly earnings from companies for direction, but the soaring inflation that has reached its highest in more than three years could unravel the outlook.
"There's a double-whammy waiting to happen," said equity trader Kevin D'Souza. "Profit growth should show a decline and a tighter policy to combat inflation would cause more harm."
Provisional results released by Bharat Heavy Electricals Ltd (BHEL), a blue-chip state-run maker of power plants, last week showed its fourth-quarter earnings had fallen. Its full-year profit grew just 16.6 per cent - at about half the pace the market had expected.
BHEL has huge orders on hand, but execution of projects in India is painstakingly slow and this is putting pressure on its earnings, D'Souza said.
Automakers, from cars to trucks and motorcycles, will have to brace for tighter margins as they have been unable to raise prices sufficiently to set off sharply higher material and marketing costs, while firmer interest rates have doused demand.
Data on Friday showed annual inflation hit seven per cent on March 22, its highest since December 2004, and well above the central bank's comfort level of around five per cent.
After the inflation data, 10-year bond yields leapt to nearly eight per cent, their highest since August, as traders braced for the Reserve Bank of India (RBI) to suck out cash from banks through an increase in the cash reserve ratio (CRR).
The CRR is the level of deposits that banks must hold in reserve with the RBI. It has been raised by 2.5 per centage points since December 2006 and now stands at 7.5 per cent. A higher CRR will reduce the money that banks can lend. Although this will squeeze the margins of banks, it will not necessarily lead to higher interests.
Analysts say the RBI is in a tight spot. It cannot raise the main interest rate, which at 7.75 per cent is already 550 basis points more than the US federal funds rate of 2.25 per cent, and risk bigger foreign arbitrage inflows.
"It's more likely the central bank would tighten the monetary situation first by hiking CRR," Prakash Subramaniam at Standard Chartered told the Economic Times. "The central bank may not inker with key rates for now."
Already some analysts are arguing the RBI should allow the rupee to appreciate sharply to fight inflation.
"If the rupee appreciates by 10 per cent, inflation comes down by about 1.7 per cent within a month and stays low for a few months," Ila Patnaik, senior fellow at New Delhi-based National Institute of Public Finance and Policy, wrote in an article in the Indian Express.
This is especially effective when inflation is caused by high global prices of food, fuel and metals - the main reason for rising prices in India.
Monetary tightening, Patnaik said, would begin to show results only after a lag of up to two years.
The rupee closed firm at 39.95 per dollar, after trading above 40 for most of the week.
India's foreign exchange reserves jumped by $4.5 billion in the week ended March 28 to a record $309.2 billion, and traders said the rise was largely due to the RBI buying arbitrage dollars flowing into India because of higher interest rates.
Foreign funds were net sellers of $434 million of stocks last week, when the Sensex fell 6.3 per cent to 15,343.12. It was the fourth drop in five weeks and took losses to nearly 24.5 per cent this year.
HSBC lowered its targets for the Sensex to 17,500 at the end of 2008 and to 21,000 by end-2009, adding there were downside risks to earnings growth.
"Looking at past trends, further downside cannot be ruled out," it said in a report. "In the worst-case scenario, Sensex may bottom out at close to 10,000."
Last week the Asian Development Bank (ADB) lowered its economic growth forecasts for the region as a global slowdown weighs on China and India, the world's two fastest growing major economies.
It forecast Asia, excluding Japan, to expand 7.6 per cent this year, less than a September estimate of 8.2 per cent. The economies grew 8.7 per cent in 2007, the fastest pace in almost two decades.
The ADB reduced its forecasts for India to eight per cent this year from 8.7 per cent in 2007 and said China's expansion will slow to 10 per cent from 11.4 per cent.
On India, it said: "The growth outcomes in the economy over the next two years will depend in part on the timing and scope for relaxing the present tight monetary policy."
- The writer is a journalist based in India.
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