Sensex will feel heat of oil prices

Mumbai: Red-hot oil prices could burn investors and pile pressure on Indian shares and the rupee this week, keep the focus firmly on inflation and spur more arm-twisting of companies by the government to contain prices.

Inflation remained stubbornly at its highest in more than three years at 7.61 per cent in late April, data showed on Friday, and Finance Minister P. Chidambaram said the authorities would take more steps to cool prices.

Steel companies lowered their prices last week, buckling to government pressure. More industries are on the radar of the government.

"We are in the process of persuading the cement companies to roll back prices. If that succeeds, that will also be an administrative step," Chidam-baram said.

The government, which has removed import duties on edible oil, cut levies on other items and raised export tariffs on some products to rein in prices, last week suspended futures trading in four commodities - soyoil, chana [chickpea], potato and rubber - for four months.

"Some of these moves are knee-jerk reactions: they can do more harm than good," said strategist V. Venugopal. "The stock market is reflecting what unofficial price controls will cause to earnings."

Even the inflation figure is questionable given the sharp revisions the government has been making to past data, he said.

Price index

On Friday, the government revised upwards the wholesale price index for the week ended March 1 by 2.3 points to 222.3 from 220 announced at that time.

"If the April 26 index is revised up by 2.3 points, inflation would be 8.7 per cent - not 7.61 per cent," he said.

Most steel companies, including Steel Authority of India Ltd and JSW Steel fell, while Tata Steel bucked the trend as the bulk of its output now comes from its overseas operation, after it acquired the Anglo-Dutch Corus last year.

The Sensex fell for the first time in five weeks last week, sliding 4.9 per cent to 16,737.07. Foreign funds dumped stocks worth $276 million in four days, after buying nearly $350 million the week before.

Technically the index, which is down 17.6 per cent this year, is on a weak footing, said chartist Kanu Dave. "It's trending lower and should go towards 14,500."

The benchmark had risen 10.5 per cent in April, posting its first monthly gain in 2008 and the best rally since October.

Venugopal said soaring oil prices, which topped a record above $126 a barrel on Friday, would rock stock markets next week barring energy issues and turn the heat on Indian markets.

India imports more than 70 per cent of its oil consumption and lower administered retail

prices have fuelled demand as car and bike sales climb at a fast clip in the rapidly growing economy.

Soaring oil prices will hurt Indian state-run refiners - Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp - the most as they are only partly compensated for selling petroleum products at state-controlled sharply lower prices.

Private sector refiner Reliance Industries, which is not compensated through government bonds, has shut its retailing outlets to stop the haemorrhaging.

Upper hand

Foreign investors will hold the upper hand this week, depending on how they view the outlook for the rupee which tumbled 2.3 per cent last week against the dollar in its biggest weekly slide in 10 years.

"The rupee may go past 42, but that will bring in exporters by the droves," said foreign exchange dealer Sashi Menon. "It could also be a trigger for foreign funds to scoop up shares cheaply."

The rupee closed last week at 41.60 per dollar, sharply weaker than 40.60 a week earlier, as refiners scrambled to buy dollars.

"The fall is reflecting global uncertainties, involving both the trade and capital accounts," Reserve Bank of India Governor Y.V. Reddy told reporters in the north-eastern city of Shillong. "Trade and current-account deficits may marginally deteriorate this year, but this will be comfortably financed by capital inflows."

Swiss investment bank UBS revised down its forecast for the rupee to 40.5 by the end of 2008. "With the rupee already at 41 our calendar year forecast of 37 is looking forlorn given that many fundamentals (inflation and trade) will continue to point in the other direction for some months yet," UBS econ-omist Philip Wyatt said in a research note.

"In our view these factors are sufficiently strong to promote further weakness at least for the next quarter, until the US enters recession and local inflation peaks out. Thereafter, the rupee should be able to recover," he said.

UBS also changed the forecast for the rupee for the end of 2009 to 38 from 35.6 earlier.

- The writer is a journalist based in India.