Business | Markets
Rally in Indian stocks likely to push index over 14,000
Momentum is with Indian shares to power ahead this week, provided the central bank doesn't play spoilsport with another wacky interest rate increase.
- By Geetha Bhaskaran, Special to Gulf News
- Published: 00:00 April 22, 2007
Mumbai: Momentum is with Indian shares to power ahead this week, provided the central bank doesn't play spoilsport with another wacky interest rate increase.
The Reserve Bank of India (RBI) reviews monetary situation on Tuesday and the popular view is that it will not hike rates, after it had unexpectedly tightened policy in March taking the benchmark lending rate to a near five-year high.
"Last week's stock rally underpins the hope that interest rates have peaked," strategist V. Venugopal said.
"Everybody understands there will be a heavy price if rates are again raised." High rates crimp spending, hurt sales and slow down economic growth - squeezing corporate earnings and resulting in lower revenue collections for the government for investment in infrastructure or poverty alleviation programmes.
Uncertainty
However the RBI, like all central banks, is hypersensitive to inflation and uses interest rate increases as a tool to cool rising prices. Data released on Friday showed annual inflation in the week ended April 7 shot above six per cent, a level the RBI is known to be uncomfortable.
This has caused some uncertainty about the RBI policy review, which may have measures to tighten money supply and slow down loans to overheated sectors like real estate.
Economists say inflation is being fuelled by food items because of a shortfall in the output of grains, pulses and oilseeds.
This needs to be tackled by boosting supplies, they say. Hiking interest rates only end up hurting the manufacturing sector where prices have been curtailed.
Finance Minister P. Chidambaram also seemed to be veering around to this view when he said after the latest data was released that he expected inflation to moderate when the government procurement agency builds up stocks from the new wheat crop that is being harvested.
The RBI has also been using another tool to douse inflation: it has let the rupee strengthen to its highest level in nine years against the dollar, making imports cheaper.
The Indian rupee closed last week at 41.77 to the dollar after earlier in the week hitting 41.62 - the strongest since India tested a nuclear device in May 1998.
It has risen about four per cent this month and is up 12 per cent from a three-year low of 47.02 last July.
Upward pressure
India's $850 billion economy, which grew an estimated 9.2 per cent in 2006-07, has been drawing in huge foreign inflows and putting upward pressure on the rupee.
It was the RBI that had always intervened to curb gains to ensure that exporters are not pushed to a corner by a stronger domestic currency.
Last week, the government said foreign direct investment almost tripled to $16 billion in 2006/07 and forecast for a 56 per cent rise in the current year.
Together with rising non-resident deposits, foreign portfolio investments and overseas borrowings by companies, the inflows have been very strong.
India}s foreign exchange reserves jumped $2.8 billion in the week ended April 13 to a record $203 billion, the RBI said on Friday.
Although a firming rupee is bad news for exporters, booming software services companies like Tata Consultancy, Infosys, Wipro and Satyam have all beat market expectations with their quarterly earnings and they have sharply increased hedging to limit currency losses.
Increasing pressure on Western companies to cut costs is also bringing in more outsourcing business to Indian firms at higher billing rates.
In the past week or so, automobile companies have tied up with banks to cut interest costs for buyers. This has lowered concerns about a sharp slow down in sales.
The 30-stock Sensex index climbed 3.8 per cent last week to 13,897.41, its best closing since late February, propelled by strong quarterly earnings results and rising US markets.
"There's strong momentum to pull ahead," said Siddarth Gupta, who advises retail clients.
"The Sensex should easily sail over 14,000 this week."
Focus this week will be on Reliance Industries, the country's most valuable company, which hit record highs on each day of last week.
The petrochemicals-to-refiner releases quarterly results on Thursday. It is developing a huge gas field off the east coast in the Krishna Godavari basin, and there is market talk of a big announcement.
It is also spearheading a retail chain across the country, and developing special economic zones. Other big results are carmaker Maruti Udyog and HDFC Bank on Tuesday, followed by mobile services giant Bharti Airtel and drugmaker Ranbaxy on Friday.
- The writer is a journalist based in India.
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