Foreign fund selling has pushed down India’s benchmark stock index 1.4 per cent in October and global economic worries are likely to build more pressure on overseas investors, but the gloomy picture could have a silver lining if Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) pull off a stunning victory in elections to two state assemblies.
Polling in Maharashtra, whose capital is Mumbai, and in the northern state of Haryana was completed on Wednesday and the results are due on Sunday. Exit polls conducted by private TV channels and media houses suggested the BJP could romp home as the dominant party in both states, humbling the Congress party-led combines. A decisive win for the BJP would embolden New Delhi to embark on a much needed economic reform programme.
An inkling of how the market would react was available on Friday when stocks rose for the first time in three days and pared losses for the week, indicating cautious optimism. Modi, who led BJP to the first single-party majority in 30 years in national elections in May, has been wooing foreign and local businessmen to make India a manufacturing hub. To achieve his ambitious plans, he would have to scrap stifling labour laws as well as reform the tax regime.
In a sign Modi means business, the government said on Wednesday that Rajiv Mehrishi, who pioneered labour reforms in Rajasthan, would take over as the top bureaucrat in the finance ministry. New Delhi also appointed former International Monetary Fund official Arvind Subramanian as the new chief economic adviser.
“For an economy like India, two things are important,” Subramanian said after his appointment was announced, “macroeconomic stability and creation of rapid investment and growth.”
Subramanian, who was a senior fellow at the Peterson Institute for International Economics in Washington, and Mehrishi would be crucial authors of the next budget, due in February.
Fuel in tank
The top-30 Sensex gained 0.4 per cent on Friday to 26,108.53, paring losses for the week to 0.7 per cent, while the 50-share Nifty settled with a weekly loss of 1 per cent at 7,779.70 after rising 0.4 per cent on Friday. Foreign funds pulled out more than $400 million from stocks this month, and the weakness in Europe, Ebola worries and the tapering of stimulus in the US could trigger more outflows.
However, market pundits say that India stood a better chance to ward off the global headwinds.
“India is fairly well placed, given where the global cycle is,” Kenneth Andrade, head of investments at IDFC Asset Management Co, which manages $7.2 billion in assets, said in an interview to Bloomberg TV, and added that the recent decline “is a corrective phase as we’ve had a good year to start with”.
The Sensex, up 23 per cent since the start of January, is the world’s top performing indices among major markets this year, thanks to net foreign inflows of nearly $13.5 billion. Falling global crude oil prices should help India, which imports about 80 per cent of its oil requirement, to fix gaping deficits and also rein in inflation pressures.
With Brent crude falling 23 per cent since the end of June, fuel costs have come off the boil and the wholesale price index for September dropped to a five-year of 2.38 per cent, according to official data released this week. Consumer price inflation was at 6.46 per cent in September, the lowest since the new series was launched in 2012.
A global wealth report prepared by Credit Suisse said dollar-millionaires in Indian could jump 61 per cent to 294,000 by mid-2019 from 182,000 in June this year. It noted that the ranks of the middle class and wealthy have been swelling, and although only 0.3 per cent of the population had a net worth of more than $100,000, in absolute terms this translates into 2.4 million people.
Expect volatility
Trading in the coming week will be restricted to three days due to Diwali, the festival of lights, and because of global uncertainty and earnings price swings could be wide. The India VIX index, a gauge used by funds as protection against volatile prices, surged to its highest level in three months before easing on Friday.
Tata Consultancy Services, the country’s largest software services company that earns the bulk of its revenue from exports, reported a lower-than-expected 13.6 per cent rise in quarterly profit due to slacker outsourcing demand in Latin American and in some industrial sectors, disappointing investors.
The company, which had consistently beaten its rivals for many quarters, lagged its smaller rivals such as Infosys that saw quarterly earnings jump 28.6 per cent. It made a net profit of Rs52.88 billion for the three months ended September 30, below street expectations of Rs53.8 billion. The results triggered a sell-off and its shares plunged the most in more than five years, sliding 8.9 per cent on Friday.
Even HCL Technologies, the fourth-largest Indian provider of outsourcing services, which reported a 32 per cent rise in net profit saw its shares tumble 9.1 per cent.
Earnings outlook
More results are due in the coming week. Some of the big ones are: Mahindra & Mahindra, Wipro, HDFC Bank, Punjab National Bank, Cairn India, Kotak Mahindra Bank, Housing Development and Finance Corp, Biocon Ltd and South Indian Bank.
Sluggish credit growth due to a sharp slowdown in demand from corporate borrowers and sticky loans portfolio should keep results in the banking sector muted. Credit growth in August was an annual 10 per cent, the lowest in 13 years. So non-interest income such as fees and treasury operations will be crucial to prop up earnings.
As for oil producer Cairn India, which is now controlled by London-based Vedanta group, recurring profit is expected to have fallen 26 per cent to Rs22.7 billion due to lower oil price realisation and higher government share from its oil wells in Rajasthan, according to DSP Merrill Lynch.
The brokerage expects Mahindra & Mahindra’s net profit likely declined 6 per cent due to higher tax rates. Net sales possibly rose 4 per cent in value as better prices helped shrug off a 4 per cent drop in aggregate volumes.
Citigroup said it expects Wipro to report 2.4 per cent quarter-on-quarter revenue growth. “Margins are expected to trend down slightly given partial impact of wage hikes. The key things to watch for would be third quarter revenue guidance (expect 2 to 4 per cent would be a good starting point), comments on large deal conversions and indications of any recovery in the retail business,” it said.
The writer is a journalist based in India.
