Sensex likely to consolidate this week

Mumbai The momentum is towards consolidation for Indian shares this week, with a sharp drop in inflation setting the ground for another round of interest rate cuts and an easier liquidity stance by the central bank.

Annual inflation fell just below nine per cent at the start of November for the first time in nearly six months, or about four per cent below its record 12.9 per cent in early August. The decline was caused by sliding commodity prices, particularly of jet fuel, naphtha, furnace oil, light diesel oil and metal prices.

The fuel price index for the 12 months ended November 1 fell 3.4 per cent from a week earlier and helped bring down the wholesale price index by 1.74 per cent, its biggest weekly decline in 18 years. The fuel index has a 14 per cent weight in the main index.

"Since inflation is down, we expect more fiscal and monetary measures to give a momentum to growth," Chandrajit Banerjee, director general of Confederation of Indian Industry, said. "The government should increase expenditure in the infrastructure sector and put on-going projects on the fast track."

RBI action

The Reserve Bank of India (RBI), which has slashed its main short-term lending rate by 1.5 percentage points to 7.5 per cent, will probably have to cut another two percentage points to jumpstart consumer spending that has shrunk sharply.

Industrial output in September recovered to 4.8 per cent from a 13-year low of 1.3 per cent in Aug-ust, but analysts said this could be a blip due to a low base in the year-earlier period. Growth in industrial production in the first half of 2008-09 halved to 4.9 per cent from 9.5 per cent.

"There is pressure on bottomlines. Production is down. We do see economic growth moderating to 7.4-7.8 per cent this fiscal," Banerjee said.

His economic forecast seems to be optimistic with even the government now talking about seven per cent - compared with nine per cent or more in the previous three financial years.

Citigroup lowered its forecast for India's econ-omic growth to 6.8 per cent for 2008-09 from an earlier projection of 7.2 per cent and cut the expansion to 5.5 per cent in 2009-10 from 6.6 per cent, but said it expected more monetary easing by the authorities to bolster growth.

"This factors an additional 200 basis point reduction in interest rates," the US financial giant said in a research note on Friday, referring to the new forecast.

It would, however, be foolhardy to expect any sharp rise in a market that has lost more than half its value this year and as the outlook for corporate earnings remains downbeat in a slowing economy.

With foreign institutional investors pulling out nearly $13 billion from Indian shares this year and domestic funds weakened by heavy redemptions in October, the market faces an uphill task to claw back.

"Unless the government takes a leaf from China and comes out with a comprehensive rescue package, I don't see the market going up in the near term," said stocks trader Nitin Dalal. China had unveiled a $586 billion plan in early November to revive its slowing economy.

"The market should consolidate in a range of 8,000 to 10,000 points," he said.

The benchmark Sensex fell 5.8 per cent last week to 9,385.42, halting a rise in the previous two weeks. The widely tracked index has lost almost 54 per cent this year.

The net profit of 1,379 listed companies in the September quarter was a third of what it was a year earlier, the Hindustan Times said last week.

"The government needs to step in before the economy is caught in a tailspin of demand destruction," the newspaper said in an editorial last week. "China has thrown a quarter of its foreign reserves to take up this slack in a slowing economy. There is little to recommend our not doing likewise. Why wait for GDP figures later this month to state the obvious?"

Citigroup said a big slowdown in consumption and investment is likely to offset the impact of monetary easing and the sharp fall in commodity prices. India was on the radar due to its deficits and its short-term external debt by residual maturity of $82 billion. "Of this, the problem area is the $43.7 billion of trade credit," it said.

"While policy officials appear to have recognised this problem and eased some norms on the capital account as well as announced dollar swap lines for domestic banks, more needs to be done."

This was clearly visible in the foreign exchange market, where the rupee fell 2.7 per cent last week to nearly 49 to a dollar, it biggest weekly drop in a month.

The rupee, which hit a record low of 50.29 in October, should slip towards 50 this week, traders said..

- The writer is a journalist based in India