Business | Markets
Sensex pins hopes on Fed rate cut
The prospect of another US interest rate cut should help investors in Indian shares overcome traditional year-end jitters and propel the market higher this week.
- By Geetha Bhaskaran, Special to Gulf News
- Published: 01:06 December 2, 2007
Mumbai: The prospect of another US interest rate cut should help investors in Indian shares overcome traditional year-end jitters and propel the market higher this week.
Although technical indicators point to a soft underbelly and foreign outflows could continue, these are unlikely to weigh down blue-chip shares for long because local money managers and retail investors will be betting big on the allocations that are expected in the new year.
"A Fed rate cut will be a big trigger," said equity trader Ashwin Dalal. "It could again open the floodgates for foreign money to pour in."
Talk of a US rate reduction gathered pace last week after Federal Reserve Chairman Ben Bernanke said renewed turbulence in financial markets had dimmed the outlook for the US economy.
"We at the Fed will have to remain exceptionally alert and flexible," Bern-anke said, triggering expectations the US central bank will cut rates at its policy meeting on December 11.
Inevitable
"A rate cut now seems all but inevitable," market research group 4CAST said in a note, while traders have begun discouting a quarter point reduction.
Foreigners moved more than $7 billion into Indian shares after the US slashed rates by a half percentage point in mid-September, taking net inflows this year to a record $17.3 billion at the end of October.
The massive inflows drove the Sensex to record highs for weeks together, but a further quarter point reduction by the Fed in late October failed to bolster the market.
Overseas portfolio funds pulled out $1.5 billion in November, and although the Sensex climbed 2.7 per cent last week to 19,363.19, it ended the month down 2.4 per cent.
Traders expect the outflows to continue as foreign funds unwind their positions before the close of the year, pocketing profits at every rise.
The selling will mainly come from the underlying assets of participatory notes that were issued to unregistered foreigners.
"The Sensex intermediate trend and larger degree trends are positive, [but] as the short-term trend remains indecisive, adopt wait-and-watch policy until it decisively moves above 19,360," Religare Securites said in a report, adding that a sustained break above that resistance could trigger a move towards 19,883-20,104.
Equity strategist V Venugopal said a US rate cut this month would put pressure on the Reserve Bank of India (RBI) to lower domestic rates.
The RBI has so far stalled calls for a reduction in rates despite the Fed cuts, by sticking to its guns of fighting inflationary pressures and excessive money supply, which is largely caused by its intervention in the currency market to rein in the strong rupee.
"It'll become increasing difficult for the RBI to hold out, especially with high interest rates pinching economic growth," Venugopal said. "Investors should grab bargains if the market drops... you may not get this opportunity in January."
India's $1 trillion economy is slowing down, led by manufacturing as five-year high rates squeeze automobiles, motorbikes and consumer durables.
Gross domestic product grew 8.9 per cent during July to September, the slowest expansion in three-quarters, data on Friday showed, below a 9.3 per cent expansion in the previous quarter.
Manufacturing grew at its weakest in seven quarters, rising 8.6 per cent compared with 11.9 per cent in the previous quarter, while electricity output slowed to 7.3 per cent from 8.3 per cent, while farming rose 3.6 per cent after a 3.8 per cent gain in the June quarter.
Finance Minister P. Chid-ambaram put up a brave face and said he expected the economy to grow at close to 9 per cent in the full year to end-March, and that inflation would remain at current levels in the months ahead.
Moderated
"Overall growth has moderated. I am confident it will be close to 9 per cent in this fiscal," he said in New Delhi on Friday.
India's economy, Asia's third-largest after Japan and China, grew 9.4 per cent in the last fiscal year, its strongest in 18 years. The RBI, which had raised interest rates five between mid-2006 and March this year, has forecast 8.5 per cent expansion in 2007-08 this year.
Venugopal said India's growth was only behind China's 11.5 per cent rise last quarter, but it was almost three times the expansion in the US and countries that share the euro.
For a domestic demand led economy, where exports accounted for only about a fifth, India's growth was largely insulated from a deceleration in major economies caused by the US subprime defaults, he said.
In October, the International Monetary Fund cut its projection for global growth next year to 4.8 per cent from an estimate of 5.2 per cent in July.
- The writer is a journalist based in India.
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