Business | Markets
Political turmoil weighs on India Sensex
While the tumble in global oil prices to below $129 a barrel should ease inflation worries and underpin Indian shares, it will be political developments that will set the trend this week.
- By Geetha Bhaskaran, Special to Gulf News
- Published: 23:05 July 19, 2008
Mumbai: While the tumble in global oil prices to below $129 a barrel should ease inflation worries and underpin Indian shares, it will be political developments that will set the trend this week.
Prime Minister Manmohan Singh, who heads a minority coalition, has called a special two-day session of parliament beginning Monday for a trust vote after the government's communist backers walked out in protest against a civilian nuclear tie-up with the US.
The Congress party-led ruling coalition and the main opposition parties have been wooing smaller regional groups and independents, and it seems the government has a tough job on its hands.
"Political uncertainty is the last thing the market wants at this point in time," said equity trader Rasesh Shah. "It could prove to be the spoiler just when we got past the dip curve."
The top-30 Sensex, which had tumbled to its lowest close in 15 months on Wednesday, rebounded more than eight per cent in the following two days to finish up 1.2 per cent last, the best weekly gain in nine weeks.
The comeback was propelled by the slide in global oil prices - from a record above $147 a barrel a week earlier to below $129 - and a recovery in world stock markets. The Sensex is down about a third in 2008.
Foreign funds that had been heavy sellers this year were the first to scoop up bargains as the fall in oil prices was expected to lower inflation pressure and probably help head off another round of interest rate increases.
"The fall in some stock prices were clearly overdone," said equity strategist V. Venugopal. "ICICI Bank, for instance, was dirt cheap and I'm not surprised the wise money is moving in now."
ICICI, the country's second-largest lender, had fallen as low as Rs514 last week - nearly a third of its 52-week high of Rs1,465. On Friday, the stock rebounded 12.1 per cent to Rs617.60.
Provisional data from the National Stock Exchange showed foreign funds had bought shares worth a net $95 million on Friday, adding to the nearly $133 million they gobbled up the previous day.
However, the outlook could be marred by economic issues too. Fitch Ratings last week cut India's local currency grade outlook to negative, saying deteriorating public finances, mainly due to subsidies, posed a risk.
The warning followed comments from Standard and Poor's the week before cautioning India over rising inflation and widening current account and fiscal deficits.
Fiscal target
Rising subsidies to offset costlier oil and food, interest payments and a possible hike in government wages are expected to make India miss this year's fiscal target by a wide margin.
"Future actions with respect to India's local currency rating will depend largely on whether the FY09 fiscal slippage is reversed, which would allow for a resumption of the decline in India's high government debt ratios," said James McCormack, Fitch's head of Asia sovereign ratings.
The Fitch move could make foreign borrowing by Indian companies more expensive.
Venugopal said the political problems posed a big risk to the economic issues, as a lame duck government would be unable to push major reforms needed to improve revenue.
"If the government loses the trust vote, it would lead to elections," he said. "No major policy decisions can be taken for a few months until a new government is sworn in."
Privatisation
The ruling coalition has completed four years of its five-year term and national polls must be held by May next year. If the government scrapes through the vote of confidence by a slender margin, it would be handicapped to bring in reforms such as privatisation and opening up the economy further to foreigners.
Earnings will be another factor this week. The big results include: Maruti Suzuki, India's top carmaker, Steel Authority of India Ltd, Bharat Heavy Electricals and Dr Reddy's Laboratories on Monday.
IDBI Bank reports on Tuesday; followed by Bharti Airtel, ACC and Idea Cellular on Thursday and Hindustan Lever, Grasim Industries, Reliance Power and Tata Power on Friday.
ICICI Bank and Reliance Infrastructure, formerly Reliance Energy, releases quarterly earnings on Saturday.
The writer is a journalist based in India.
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