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Sensex unlikely to reverse trend
Jittery global markets will continue to weigh down Indian shares this week, but state-run banks could rally after Finance Minister P. Chidambaram said the government would give them by August more than a third of the $15 billion of farm loans written off.
- By Geetha BhaskaranSpecial to Gulf News
- Published: 00:01 March 16, 2008
Mumbai: Jittery global markets will continue to weigh down Indian shares this week, but state-run banks could rally after Finance Minister P. Chidambaram said the government would give them by August more than a third of the $15 billion of farm loans written off.
Explaining for the first time since the February 29 budget that announced the massive loan waiver, the finance minister told parliament on Friday after the market had closed that the government would pay banks in cash for the sticky loans.
"The financing package is largely front loaded," he said. In July and August, the government will reimburse Rs250 billion to the banks, with another payment of Rs150 billion by July 2009. The remaining Rs200 billion will be handed over by 2012, he said.
Traders said this would boost the bank shares, which had been sagging due to the lack of clarity on how the government would pay for the waiver. Government-controlled ones like State Bank of India, Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank and Corporation Bank are some that would benefit.
"Most of these loans were non-performing assets and many banks had already written them off," said Biju Dominic who advises retail clients in Mumbai. "The government pay-off is a bonus for the banks."
However, the overall market sentiment is unlikely to perk up in a hurry, with a looming US recession and global credit problems causing much unease.
After a $200 billion cash injection by the US to stem the rot which helped only momentarily last week, there is talk the Federal Reserve may cut its main overnight rate by a full percentage point to two per cent on Tuesday. Others are betting the reduction will be 75 basis points.
Sharp US rate cuts usually drive funds to high-yielding markets such as India, but this has not been the case so far this year. In September when the Fed slashed rates more than $7 billion flowed into Indian stocks in about seven weeks. Since the start of January, however, there has been a net outflow of over $3 billion despite more Fed cuts.
"You can put that down to growing risk aversion," said Dominic. "Confidence has taken a beating - oil, gold and commodities are at record highs, while the dollar has plunged taking stocks with it."
The Sensex, which plummeted to a six-month low on Thursday, recovered slightly on Friday to end the week down 1.35 per cent at 15,760.52. Chartist Kanu Dave said the index was on a weak footing and any rise would run into strong resistance.
"The Sensex will have to head towards 14,000 for a strong rebound to begin," he said. "There is no real momentum for an upswing - it is way below its 200-day moving average of 17,185.58."
Fundamental factors
Fundamental factors are also beginning to bite. Industrial output in January grew a modest 5.3 per cent from a year earlier, sharply below expectations for about eight per cent and upwardly revised 7.7 per cent in December, the government said last week.
Output growth has dwindled steeply from double-digit rates at the start of April as high interest rates have curbed consumer borrowing. In January, output of durable consumer goods such as large household items contracted by 3.1 per cent.
Capital goods output, a barometer of industrial activity, expanded just 2.1 per cent. Manufacturing, which accounts for 15 per cent of gross domestic product, rose 5.9 per cent, compared with downwardly revised growth of 8.3 per cent in December.
Deutsche Bank last week lowered its target for the Sensex by 22 per cent to 18,000 a year from now against an earlier forecast of 23,000 by December.
"We continue to expect further earnings downgrades in 2008 with the US in a likely recession," strategist Pratik Gupta said in a note to clients, adding a delay in a likely interest rate cut this year also contributed to the revised target.
Deutsche said export-led companies and sectors that could suffer from a slowdown in global economic growth like software services, drug makers, metals and oil and petrochemicals should be avoided. It recommended rate-sensitive sectors such as automobiles, private banks, capital goods, cement and media.
The government is facing a policy dilemma with slowing growth and accelerating inflation, which climbed to nine-month high of 5.11 per cent in early March.
Last week, JP Morgan cut its forecast for India's economic growth in 2008-09 to seven per cent from 7.5 per cent, which would be the country's slowest pace of expansion in six years. The projection was lower than a government expectation of 8.8 per cent.
"India's GDP revision owes to expectation of moderation in growth in industry and service sectors that will likely be greater than what was reflected in the prior forecast," economists Rajeev Malik and Gunjan Gulati at the US investment bank said in a note.
"Growth is poised to pick up to eight per cent in 2009-10, and the medium-term favourable structural dynamics remain in place," the economists said.
The writer is a journalist based in India.
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